Ontario: the Court of Appeal leaves determining who discovers a corporation’s claim to another day

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]      I need not resolve this issue because […].
 The Court also overturned the motion judge’s s. 5 analysis on the basis that it ignored the objective component of the modified-objective test.  It’s a very good critique, and provides a helpful list of the considerations that might inform the test’s application:

[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.

 [30]      She said:
 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.

Ontario: whose knowledge binds a corporation?

Whose knowledge binds a corporation for the purpose of a s. 5 discovery analysis?

The Superior Court decision in 1511419 Ontario Inc. v. KPMG considers this issue:

[91]           The Defendants dispute that the Minutes of the Board are in fact the “best evidence” of what the Board knew in or around the time of the January 2012 Transaction.

[92]           They submit that a full meeting of the Board is not required for a corporation to acquire knowledge that it would otherwise obtain through its directing minds such as officers or directors: DBDC Spadina Ltd. v. Walton2018 ONCA 60 (CanLII)419 D.L.R. (4th) 409, at paras. 59-60, leave to appeal to S.C.C. allowed, 2018 CarswellOnt 19181Canadian Dredge and Dock Company Limited v. R.1985 CanLII 32 (SCC)[1985] 1 S.C.R. 662, at pp. 679-685, 707-709, 713-714, and 717-718.

[93]           They further go on to submit that it is also not clear what was recorded in the Board or Audit Committee Minutes, and overall the Minutes are not reliable.

[94]           Cash Store responds by submitting that, as a matter of law, the directing mind of a public corporation is its board of directors, acting as a collective: Stern v. Imasco Ltd. (1999), 1999 CanLII 14934 (ON SC)1 B.L.R. (3d) 198 (Ont. S.C.), at paras. 98-113.

[95]           I do not propose to determine this dispute on this motion. I am prepared to accept that the Board Minutes are, at the very least, some evidence of what Cash Store knew at the relevant time periods.

Surprisingly, this significant limitations question remains to my knowledge unanswered.  It seems to me that the answer will be, as it usually is in the context of discovery arguments, “it depends on the facts”.

However, I am also mindful of the policy implications of the issue.  It’s problematic to deem the knowledge of directing minds to be the knowledge of a corporation for discovery purposes.  If an employee discovers a claim, and that discovery does not bind the corporation, the employee could determine when the limitation period commences by determining when to disclose her knowledge of the discovery matters to a directing mind.  This risks encouraging corporations to sit on their rights until they consider it most advantageous to exercise them. A directing mind of a corporation might advise an employee to refrain from disclosing any fraud allegations until confident in the success of a claim arising from them. This would be antithetical to the basic purpose of the limitations scheme to encourage the diligent and timely prosecution of claims.

Lastly, the decision is a warning against asking the court to decide a too-complicated limitations defence on summary judgment:

[113]      I cannot determine this matter in a fair and just manner by way of summary judgment. A review of the aforementioned affidavits and voluminous yet limited record do not provide the adequate context to determine the limitation period dispute. Particularly, I have no meaningful understanding as to the interaction between the parties in and around the time of the January 2012 Transaction that would assist me in determining the limitation issue. I also have no meaningful understanding of the assistance, or lack thereof, the Defendants rendered to Cash Store before, during, or after the January 2012 Transaction closed. The actions involve a complicated factual matrix involving professional negligence and a significant damages claim. In my view, the usual rule enunciated by Nordheimer J.A. in Mason should be followed. A full evidentiary record including viva voce evidence of the parties is required to achieve a fair and just result.