In Service Mold + Aerospace Inc. v. Khalaf, the Court of Appeal confronted the question of whose knowledge informs the s. 5 analysis when the plaintiff is a corporation, but without answering it. This was the second time in 2019 that a court acknowledged that this remains unresolved without resolving it.
[28] In appealing this finding, the appellant bank focused primarily on its claim that the motion judge erred in principle by using Mr. Schuurman’s abilities and circumstances, instead of those of the corporations. It argues that since the claim belongs to the corporate plaintiffs, the s. 5(1)(b) test should have focused on their abilities and circumstances, not Mr. Schuurman’s.
[29] […] in my view, the motion judge clearly erred in applying the modified objective test by conducting a purely subjective inquiry. Rather than imbuing the hypothetical reasonable person with the abilities and circumstances of Mr. Schuurman, she imparted on that person the attitudes and practices of Mr. Schuurman, thereby defeating the objective reasonableness inquiry.
The reasonable person standard is to be applied taking into account the “abilities” and the “circumstances of the person with the claim”. It seems to me that when the “reasonable person” standard in the context of s. 5(1)(b) is applied in this case, the circumstances of Mr. Schuurman include the organization of his business at the time of the fraud. The organization of the business, and particularly the bookkeeping part of that business, lacked a segregation of duties. Without a segregation of duties as described by Ms. Grogan, the plaintiffs were vulnerable to bookkeeper fraud. To put the analysis another way, the “abilities and circumstances’” of Mr. Schuurman included his overly trusting, perhaps gullible nature and his resultant vulnerability.[31] First, an issue in the case was whether the respondent corporations failed to know what they ought to have known, because the bookkeeping part of their business was not monitored as it reasonably should have been. The motion judge begged that question by assuming that a reasonable person would have the same bookkeeping practices as the respondent corporations had. Simply put, in identifying the “circumstances of the person” that the reasonable person will share with the plaintiff, it is an error in principle to infer that the reasonable person would conduct itself in the same way that the plaintiff did. To do so is to eviscerate the objective component of the test. That is what the motion judge did here.
[32] Second, s. 5(1)(b) is about knowing what one ought to know. In context, the reasonable person component of s. 5(1)(b) serves to ensure that the plaintiff acted with reasonable levels of prudence and attention in attending to the risk of injury, loss or damage. Because the objective component of the test is modified, the degree of prudence and attention that can reasonably be expected will vary among persons with claims, according to their abilities and circumstances – things such as level of intelligence, education, experience, resources, health, power imbalances, dependence, and situational pressures or distractions that might bear on the ability to appreciate what is happening. It is imperative to remember, however, notwithstanding that the term “abilities” may be wide when viewed in isolation, s. 5(1)(b) requires that once material characteristics are attributed to the reasonable person, that hypothetical person will remain reasonable. If the hypothetical person is imbued with unreasonable imprudence or inattention the objective component of the test is defeated, and only one result can obtain.
