Grant Thornton LLP v. New Brunswick, 2021 SCC 31

What is the test for the discoverability of an auditor’s negligence claim?

In the fall of 2008, the Atcon Group of Companies (“Atcon”) – a New Brunswick-based provider of construction, energy, industrial and waste management services – sought loans from the Bank of Nova Scotia, but needed loan guarantees from the Province of New Brunswick to obtain them. The Province agreed to provide $50 million in loan guarantees, conditional upon an external review of Atcon’s assets by Grant Thornton.

On June 18, 2009, Grant Thornton delivered its Unqualified Auditors’ Report to the Province. Grant Thornton confirmed that it had reviewed Atcon’s financial statements in accordance with Generally Accepted Auditing Standards. It opined that Atcon’s statements presented “fairly, in all material respects, the financial position of Acton as at January 31, 2009 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles”. Relying on this, the Province executed and delivered the loan guarantees, which enabled Atcon to borrow funds from the Bank of Nova Scotia.

Atcon’s financial difficulties persisted and the company ran out of working capital by October 2009. The Bank of Nova Scotia applied for a receivership order, which was granted, and called on the Province to pay out the loan guarantees, which the Province did. The Province also retained an accounting and auditing firm to review Atcon’s financial position and issue a report on its findings.

The auditor’s report was issued in draft on February 4, 2011 and finalized on November 30, 2012. The findings differed from those in the Unqualified Auditors’ Report produced by Grant Thornton. The auditor opined that Atcon’s financial statements had not been prepared in conformity with Generally Accepted Accounting Principles. The report identified various errors in the financial statements, which were considered to be “material”, and estimated that Atcon’s assets and net earnings were overstated by $28.3 million to $35.4 million.

On June 23, 2014, the Province filed a statement of claim against Grant Thornton, seeking damages for negligence. In response, Grant Thornton brought summary judgment motions to have the Province’s claim dismissed as statute-barred by virtue of the two-year limitation period under s. 5(1)(a) of the New Brunswick Limitation of Actions Act.

The motions judge granted summary judgment in favour of Grant Thornton. He held that a plaintiff needs to know only enough facts to have prima facie grounds to infer the existence of a potential claim. The Province knew or ought to have known that it had prima facie grounds to infer that it had a potential claim against Grant Thornton more than two years before commencing its claim.

The Court of Appeal overturned that decision, and held that discovery of a claim requires actual or constructive knowledge of facts that confer a legally enforceable right to a judicial remedy. Thus, in addition to knowledge of a loss and causation, a claim in negligence would include knowledge of a duty of care, as well as knowledge of a breach of the standard of care. The Court of Appeal held that the two-year limitation period had not been triggered because the Province had not yet discovered its claim. Grant Thornton appealed to the Supreme Court of Canada.

The Supreme Court held that neither court’s approach accurately described the degree of knowledge required to discover a claim and trigger the limitation period. Instead, the Court held that a claim is discovered when a plaintiff has knowledge—actual or constructive—of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn. In assessing the plaintiff’s state of knowledge, both direct and circumstantial evidence can be used. Moreover, a plaintiff will have constructive knowledge when the evidence shows that the plaintiff ought to have discovered the material facts by exercising reasonable diligence. Suspicion may trigger that exercise.

The plausible inference of liability requirement ensures that the degree of knowledge needed to discover a claim is more than mere suspicion or speculation. This accords with the principles underlying the discoverability rule, which recognize that it is unfair to deprive a plaintiff from bringing a claim before it can reasonably be expected to know the claim exists. At the same time, requiring a plausible inference of liability ensures the standard does not rise so high as to require certainty of liability or “perfect knowledge”.

Here, the Supreme Court held that the Province discovered its claim on February 4, 2011, when it received the draft auditor’s report. At that point, the Province had actual or constructive knowledge of the material facts—namely, that a loss occurred when it paid out the loan guarantees to the Bank of Nova Scotia and that the loss was caused or contributed to by an act or omission of Grant Thornton. Nothing more was needed to draw a plausible inference that Grant Thornton had been negligent.

The Province did not need access to Grant Thornton’s audit-related files to plausibly infer that Grant Thornton had breached the applicable standard of care by failing to conduct the audit in accordance with Generally Accepted Auditing Standards. In particular, from the material misstatements identified in auditor’s report, the Province could have inferred that the loss was the fruit of an audit that fell below the applicable standards.

The Supreme Court concluded that the Province’s claim was statute-barred and allowed Grant Thornton’s appeal.

Counsel: Lenczner Slaght (Toronto) and McInnes Cooper (Fredericton) for Grant Thornton; Foster & Company (Fredericton) for Grant Thornton International Ltd.; Stewart McKelvey (Fredericton) for the Province of New Brunswick; BLG (Toronto) for the Chartered Professional Accountants of Canada (intervenor)

Judges: Moldaver J. (Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ. concurring)