Discoverability provisions extend limitation periods in professional liability actions

Background

In the Province of New Brunswick v. Grant Thornton 2020 NBCA 18, the New Brunswick Court of Appeal concluded that a discovery-based limitation period prescribed by a limitations statute does not begin to run when a claimant knows, or reasonably ought to know, that he or she has a potential claim.  Instead, the Court held that the limitation period does not begin to run until the claimant knows, or reasonably ought to know, that the defendant breached the standard of care. 

The Supreme Court of Canada has granted leave to appeal and it will be seeking to balance the interests of plaintiffs in not being barred before they know they have a cause of action and the interests of defendants in eliminating stale claims to prevent the abuse and injustice that can result from litigation commenced long after relevant events have occurred and to bring certainty, stability and finality to human and commercial affairs.¹

In Central Trust Co. v. Rafuse², the Supreme Court of Canada articulated the seminal rule that "a cause of action arises for the purposes of a limitation period when the material facts on which it is based have been discovered or ought to have been discovered by the plaintiff by the exercise of reasonable diligence". Since then, a number of provinces, including BC, Alberta, Saskatchewan, Ontario, New Brunswick ("NB") and Nova Scotia have amended their limitation acts and incorporated the "discovery" principle into general limitation periods.

Section 5(1)(a) of the Limitation of Actions Act in NB was the limitation provision considered in New Brunswick v. Grant Thornton and it is similar to other provinces' discoverability provisions.  Section 5(1)(a) says that no "claim" may be brought against a "defendant" after 2 years following the day on which the claim was "discovered" by the "claimant".

The Litigation

NB commenced an action in negligence against Grant Thornton LLP, one of its partners, and Grant Thornton International Ltd. (jointly "Grant Thornton") for the allegedly sub-standard audit of financial statements of certain companies ("Atcon") for the fiscal year ending January 31, 2009.  In its action, NB sought to recover damages corresponding to the $50 million it was required to pay in March 2010, by virtue of loan guarantees NB had to honour to Atcon's bank after Acton became insolvent.  NB claimed it relied on Grant Thornton's unqualified auditor's report when NB decided to provide the loan guarantees.  After paying the $50 million, NB retained a different auditing firm, RSM Richter Inc. ("RSM") to review and comment on Atcon's financial position.  In February 2011, RSM provided NB with a draft report expressing the opinion that Atcon's financial statements had not been prepared in accordance with Generally Accepted Accounting Principles and that they overstated Atcon's assets and net earnings.  NB commenced its action on June 23, 2014 and Grant Thornton applied for summary judgment on the basis that NB's  claim was time barred.  The motions judge allowed Grant Thornton's application after concluding that NB "discovered" its claim more than two years before commencing the proceeding.  The Court of Appeal allowed NB's appeal, concluding that the applicable test was more exacting than the one applied by the motions judge, so that the two year limitation period does not begin to run until a claimant discovers it has a claim , which the Court characterized as a legally enforceable right to a remedy, as opposed to discovering it has a potential claim.

In its decision, the Court of Appeal concluded that the discovery requirement would not be met until NB had the opportunity to examine Grant Thornton's audit-related files and establish that the 2009 audit was not prepared in accordance with Generally Accepted Auditing Standards.  Before it had access to the audit-related files, NB could not be expected to know that it had a "legally enforceable right to a judicial remedy".  The Court noted RSM's evidence that it was retained "to determine whether or not the financial statements…have been prepared in all materials respects in accordance with Generally Accepted Accounting Principles" which was a mandate "separate and distinct from an inquiry to whether [Grant Thornton] conducted its audit in accordance with Generally Accepted Auditing Standards".  RSM's evidence was that its report "does not provide any opinion on, nor should any comment in [the Report] be construed as an opinion on the work of Atcon's auditor Grant Thornton".  The Court noted that an opinion about the audit work of Grant Thornton could not be reached without accessing and reviewing Grant Thornton's audit-related files and neither RSM nor NB had access to those files. Consequently, the limitation period would not begin to run until NB had access to Grant Thornton's audit files.

Consequences of the Court of Appeal Decision

This decision increases the length of time plaintiffs have before they must commence an action where it takes some time to discover whether they have a "legally enforceable right to a judicial remedy".  Examples of the consequences could include:

1. A bridge owner may not know if it has a legally enforceable right to a judicial remedy against a bridge designer and builder when a bridge collapses. 
2. A patient may not know if he or she has a legally enforceable right to a judicial remedy against a doctor and hospital when a surgical procedure goes wrong.
3. A consumer may not know if he or she has a legally enforceable right to a judicial remedy against a manufacturer when a product causes an injury.

If the decision is upheld by the Supreme Court, in the identified examples, the limitation period may not start to run until the bridge owner, the patient and the consumer obtain opinions that the relevant standard of care was not met after obtaining the documents and information required in order to permit an expert to properly consider the issue.