Simon's Megalomaniacal Legal Resources

Limitations Act - Discoverability - Objective Knowledge (2)

. Sun v. Cheng

In Sun v. Cheng (Ont CA, 2023) the Court of Appeal considered (and dismissed) an appeal from a summary judgment dismissal, here on limitation discovery 'knowledge' grounds where the motion court below distinguished between knowledge of 'material facts' and "the legal conclusion to be drawn from those facts":

[10] Her submission that she could not have known about her claim for breach of fiduciary duty until she saw the referral agreement does not alter the analysis. As the motion judge said, this “confuses knowledge of the material facts on which the claim is based with the knowledge of the legal conclusion to be drawn from those facts.” She pleaded in the Teefy action that the real estate agents pressured her. She knew that Wang and Cheng were her agents. She therefore knew the material facts underlying the claim.

. Di Filippo v. Bank of Nova Scotia

In Di Filippo v. Bank of Nova Scotia (Ont CA, 2023) the Court of Appeal considered the Limitations Act s.5(1)(b) 'due diligence' provision [ie. "the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters"]:

[53] The framework for determining the commencement of a limitation period is found in the Grant Thornton decision. As stated above, the broad test for what has to be discovered is: “the material facts upon which a plausible inference of liability on the defendant’s part can be drawn.” To meet this standard, the plaintiff must have “actual or constructive knowledge that: (a) the injury loss or damage occurred; (b) the injury loss or damage was caused by or contributed to by an act or omission; and (c) the act or omission was that of the defendant.”: at para. 43.

[54] The court explained how to assess the plaintiff’s knowledge at para. 44:

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. (Crombie Property Holdings Ltd. v. McColl-Frontenac Inc., 2017 ONCA 16, 406 D.L.R. (4th) 252, at para. 42).

[55] This court explained in Crombie that suspicion may trigger the due diligence obligation, but suspicion does not constitute actual knowledge. The full paragraph clearly explains the difference:

That the motion judge equated Crombie’s knowledge of possible contamination with knowledge of actual contamination is apparent from her statement that “[a]ll the testing that followed simply confirmed [Crombie’s] suspicions about what had already been reported on” (at para. 31). It was not sufficient that Crombie had suspicions or that there was possible contamination. The issue under s. 5(1)(a) of the Limitations Act, 2002 for when a claim is discovered, is the plaintiff’s “actual” knowledge. The suspicion of certain facts or knowledge of a potential claim may be enough to put a plaintiff on inquiry and trigger a due diligence obligation, in which case the issue is whether a reasonable person with the abilities and in the circumstances of the plaintiff ought reasonably to have discovered the claim, under s. 5(1)(b). Here, while the suspicion of contamination was sufficient to give rise to a duty of inquiry, it was not sufficient to meet the requirement for actual knowledge. The subsurface testing, while confirmatory of the appellant’s suspicions, was the mechanism by which the appellant acquired actual knowledge of the contamination.

[56] Similarly, in Kaynes v. BP p.l.c., this court held that knowledge of allegations in pleadings does not, without more, constitute actual knowledge of one’s claim. In that case, a U.S. claim for misrepresentation in securities filing documents was required to allege fraud, referred to as “scienter”, in order to make out a legally enforceable action. The allegation of scienter did not give Canadian class plaintiffs actual knowledge of any fraudulent intent by BP. It was only an allegation to be investigated.

[57] The motion judge below made the same error as was made in Crombie. He treated facts which might trigger a duty to investigate as material facts sufficient to trigger the limitation period – in his words, “the who and the what”. The class plaintiffs in this case had actual knowledge that there was a conspiracy among a number of financial institutions to fix and manipulate the price of gold and silver on the trading markets. That is the “what.”

[58] However, based on the allegations in the U.S. pleadings and in the press release of the WEKO investigation, they only had suspicion of the “who”. Both a statement of claim and a government investigation, by their very nature, express allegations, not facts. In fact, the U.S. pleadings naming Bank of America and Merrill Lynch were ultimately struck with prejudice in July 2018, and the WEKO investigation into Morgan Stanley was terminated after Swiss authorities determined that suspicions of conspiracy were not substantiated.

[59] These examples draw out an important distinction from Grant Thornton: actual knowledge does not materialize when a party can make a “plausible inference of liability.” Rather, actual knowledge materializes when a party has “the material facts upon which a plausible inference of liability on the defendant’s part can be drawn” [emphasis added]. While class counsel may have had reason to suspect that Bank of America, Merrill Lynch and Morgan Stanley were part of the conspiracy, that suspicion was not actual knowledge. The motion judge erred in law by finding actual knowledge.

[60] Because the U.S. pleadings and WEKO press release did not disclose the necessary material facts, it was an error of law to find that the proposed amendments were statute barred on the basis that class counsel had actual knowledge of the claims against Bank of America, Merrill Lynch and Morgan Stanley more than two years before the motion to amend was brought.

[61] Section 5(1)(b) of the Limitations Act sets out an alternative, objective basis for finding that a limitation period has commenced, based on when the plaintiff ought to have known the facts that form the basis for the claim and therefore had constructive knowledge of it:

A claim is discovered on the earlier of,

...

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[62] The motion judge in this case did not decide when the plaintiffs had constructive knowledge that they had a claim under s. 5(1)(b) because he agreed with the submissions of the defendants that the plaintiffs had actual knowledge of it.

[63] In Mancinelli v. Royal Bank of Canada, 2018 ONCA 544, this court held that where the facts regarding discoverability under s. 5(1)(b) are in dispute, the correct approach is for the motion judge to allow the addition of the new parties, but also allow the new parties to plead the limitations defence, with the issue to be determined at trial or on summary judgment.

[64] The effect of s. 5(1)(b) is to impose an obligation of due diligence on those who have reason to suspect that they may have a claim, but who do not yet have actual knowledge of the material facts giving rise to that claim: Crombie, at para. 42. Where potential plaintiffs sit idle or fail to exercise due diligence, the limitation period will commence on the date that the claim would have been discoverable had reasonable investigatory steps been taken. In other words, it is the date when the potential plaintiffs have constructive, as opposed to actual knowledge of their claim: Grant Thornton, at para. 44.

[65] A court determining this issue will require evidence of how the material facts could reasonably have been obtained more than two years before the motion to add was brought: Mancinelli, at paras. 28, 31; Morrison v. Barzo, 2018 ONCA 979, at paras. 61-62.

. Espartel Investments Limited v. Metropolitan Toronto Condominium Corporation No. 993

In Espartel Investments Limited v. Metropolitan Toronto Condominium Corporation No. 993 (Ont CA, 2023) the Court of Appeal considered (and dismissed) an appeal of an interesting restitution/limitation issue, here where the parties had agreed for years on a cost-sharing formula which resulted in overpayments.

In these quotes the court considered the discoverability issue of what I call 'objective knowledge' (here referred to as 'constructive knowledge') [LA 5(1)(b) - ie. "the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters ..."]:

(1) Discoverability

[14] There is no dispute that, under ss. 4 and 5 of the Limitations Act, a party must normally sue within two years of the discovery of their claim. This basic limitation “clock” starts running when the plaintiff has actual knowledge of the material facts that give rise to a claim, or when it ought to have known of those facts through the exercise of reasonable due diligence: Grant Thornton LLP v. New Brunswick, 2021 SCC 31, 461 D.L.R. (4th) 613, at para. 29. The level of actual or constructive knowledge needed is more than mere suspicion or speculation, but less than perfect knowledge of liability: Grant Thornton, at para. 46; Zeppa v. Woodbridge Heating & Air-Conditioning Ltd., 2019 ONCA 47, 144 O.R. (3d) 385, at para. 41, leave to appeal refused, [2019] S.C.C.A. No. 91.

[15] The appellant accepts that the respondent did not have actual knowledge of its claim prior to 2017. However, it alleges that the trial judge erred both in fact and law in finding that the respondent did not have constructive knowledge.

(a) No Error in Finding that the Invoice Errors were not Apparent

[16] The appellant argues that the errors in the formula were visible on the invoices, which the respondent reviewed every year. It challenges the trial judge’s finding that the errors in the formula were not apparent on the face of the invoices, and so were not reasonably discoverable. The appellant concedes that this finding is reviewable on the highly deferential standard of palpable and overriding error.[5]

[17] The crux of the appellant’s argument is that the respondent is a hotel that employed a general manager, a comptroller, and an accounting firm to review the invoices every year. It argues that any competent commercial entity properly reviewing the invoices would have discovered the errors, which were in plain view.

[18] To this end, during oral argument, appellant’s counsel took the panel to additional errors in the invoices, which were not noticed even at trial. Counsel argued that since they were able to find these errors, it follows that the respondent – a sophisticated commercial entity with outside auditors – should have found them too. The fact that nobody caught the errors before shows that nobody actually did the work to sit down and read the invoices properly.

[19] We do not accept the appellant’s submission. The fact that errors are capable of being discovered does not necessarily start the running of the limitations clock. The trial judge was required to determine when a reasonable person with the respondent’s abilities and in its circumstances ought to have discovered the flaws in the invoices: Crombie Property Holdings Limited v. McColl-Frontenac Inc. (Texaco Canada Limited), 2017 ONCA 16, 406 D.L.R. (4th) 252, at para. 43, leave to appeal refused, [2017] S.C.C.A. No. 85. Put another way, it is reasonable discoverability − rather than the mere possibility of discovery − that triggers the limitation period under s. 5(1)(b) of the Limitations Act: Van Allen, at para 34. And, just because appellate counsel who are looking for errors in a document can find them, it does not follow that the errors would have been apparent at the time to the people who actually used those documents. Certainly, it does not mean that the trial judge made a palpable and overriding error in finding that the errors were not obvious on the face of the invoices.

[20] The trial judge found that the parties had employed the same invoicing process for well over a decade. She found that over the previous 15 years, no one had raised the possibility of overpayment, including the appellant, who was responsible for inputting the data to calculate the respondent’s share. Whenever the respondent compared its bill to previous years, the numbers appeared comparable. The trial judge concluded that “[t]he errors though became imbedded, in a sense, and as the parties suggested may have existed for 20 years” and that the errors therefore justifiably came as a surprise to the respondent.

[21] Further, the trial judge emphasized that none of the respondent’s accountants, auditors, or managers noticed the errors when they reviewed the invoices. Contrary to the appellant’s position, this was not a conflation of actual and constructive knowledge. Given the backdrop of the longstanding invoicing arrangement between the parties, it was open to the trial judge to use the respondent’s annual reviews as evidence that it did not discover the errors because they were not apparent on the face of the invoices.

[22] Next, the appellant argues that since the consultant who was retained to review the invoices was able to identify the errors with “relative ease,” those errors must have been apparent on the face of the document and could easily have been discovered by the respondent. This argument misapprehends the record. The consultant’s report that explained the nature of the errors was admitted at trial on consent for the truth of its contents, but the consultant himself did not testify. The report does not state whether it was easy or difficult to identify the errors. The consultant’s report thus does not undermine the trial judge’s conclusions on discoverability.

[23] Finally, the appellant argues that the trial judge appears to have misstated the nature of the errors on the spreadsheets in parts of her judgment. This submission appears to rest on the premise that if the trial judge erred in one statement of fact, then her conclusion that the errors were not apparent on the face of the invoice was inherently suspect. We know of no authority for such a proposition, and the appellant provided none. In any event, it is clear from her reasons that the trial judge was relying on the description of the errors from the consultant’s report, which was the basis of an agreed statement of fact. The fact that the trial judge may have slightly misstated the errors in her judgment is of no moment.

[24] In sum, it was open to the trial judge to conclude that the errors in the invoices in this case were of such a technical and subtle nature that the respondent could not have been expected to find them through the exercise of reasonable due diligence. We see no palpable and overriding error in the trial judge’s finding that the errors were not apparent on the face of the invoices.

(b) No Reversible Error in Assessing Due Diligence

[25] Second, the appellant contends that the trial judge made legal errors in her analysis of the respondent’s due diligence. The appellant submits that the trial judge held the respondent to an erroneously low burden of proof for demonstrating that it took reasonable due diligence.

[26] At one point in her reasons, the trial judge stated:

The evidentiary threshold for a “reasonable explanation on proper evidence” as to why the claim could not have been discovered through the exercise of reasonable diligence is low, and the plaintiff’s explanation should be given a generous reading and considered in the context of the claim: Morrison v. Barzo, 2018 ONCA 979, 144 O.R. (3d) 600, at para. 32. Beyond that though, there is overwhelming evidence of a reasonable explanation and due diligence by the plaintiff.

[27] The appellant argues that the trial judge misinterpreted this court’s decision in Morrison v. Barzow, 2018 ONCA 979, 144 O.R. (3d) 600, as setting a low evidentiary burden on plaintiffs to demonstrate why a claim would not have been discovered earlier through the exercise of reasonable due diligence.

[28] We agree that in this impugned passage, the trial judge misstated the law on reasonable discoverability. The low evidentiary standard referenced by this court in Morrison related to a motion to add a defendant to an action. Morrison did not purport to set the overall standard to be met at trial. The standard of proof at trial remains the balance of probabilities: F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41, at para. 40. The trial judge thus erred to the extent she implied otherwise.

[29] However, any such error was harmless, as it was not material. Immediately after this impugned statement of law, the trial judge found that there was “overwhelming evidence of a reasonable explanation and due diligence by the plaintiff.” Her initial reference to a low evidentiary burden thus had no material impact on her conclusions.

[30] Nor do we accept the appellant’s submission that the trial judge ignored the evidence that in 2015, the hotel’s then-new manager became concerned by the high electricity bills. The appellant argues that this suspicion should have weighed heavily in the assessment of the respondent’s due diligence. With respect, this is a red herring. Suspicion can trigger a heightened due diligence requirement, but that suspicion must relate to a plausible inference of the specific defendant’s liability: Grant Thornton, at paras. 44-45. On the findings of the trial judge, nothing in the underlying arrangement between the parties changed in 2015 that would have made the errors apparent through the exercise of reasonable due diligence. The fact that the respondent became more concerned about its electricity bill in 2015 does not diminish the appellant’s responsibility for its flawed calculations nor does it detract from the trial judge’s determination that the respondent acted with due diligence in its review of the invoices.