Many types of business records do not have a prescribed statutory or regulatory retention periods. In some cases, organizations may use limitation periods for lawsuits to inform the choice for a retention period. There is nothing objectionable to this practice but it can be too simplistic.
Consider the record retention policy of hypothetical company ABC Co. located in Ontario. Let’s assume ABC Co. produces widgets. Although this discussion applies equally to the services industry, it is easier to illustrate with products. Let’s also assume that the record retention policy states that design and production records are to be kept for 2 years after the year in which the last shipment of its widgets were produced. ABC Co. chose this retention period because it understands that the limitation period for bringing a claim in Ontario is 2 years.
There are a number of problems with the way in which ABC Co. chose the retention period.
First, the retention period assumes that the only applicable limitation period is the one in Ontario. That might be a fine assumption if ABC Co.’s products were only sold and used in Ontario. If not, then the applicable limitation period for negligence might be the limitation period in another jurisdiction, depending on conflict of laws rules.
Second, the retention period assumes nearly immediate discovery of any problems with the widgets and does not take into account the possibility of a latent defect. But what if the defect is hidden and isn’t discovered for several years? In Ontario, the basic limitation period under the Limitations Act, 2002 is 2 years from the date the claim is discovered. In simple terms, a claim is discovered on the day on which the person knew or ought to have known that (i) that the injury, loss or damage had occurred (ii) that the injury, loss or damage was caused by or contributed to by the faulty widget (iii) that the act or omission was that of ABC Co., and (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it. If the defect in ABC Co.’s widgets take a few years to discover, then the limitation period won’t start running until that time.
Third, the chosen retention period does not take into consideration of the useful life of the product or the probability of the defect occurring at different points over that useful life. Let’s assume that the useful life of the widget it 20 years and let’s assume that the probability of the defect going undetected for 10 years is high. In this fact scenario, the records might be relevant between 10 and 15 years from distribution. The ultimate limitation period based on the “act or omission” of ABC Co. (rather than discoverability) is 15 years under the Limitations Act, 2002. Therefore, a person who has a claim because of the defective widget might have up to 15 years to discover the defect.
Finally, the chosen retention period does not take into account whether the records are likely to be useful to ABC Co. with respect to the most likely types of risks of dispute. Quality control records and records regarding tests performed on the widgets might be very useful. Design documents may also be useful, particularly if the widgets were designed by others. But daily run records may not be of high value.
So, ABC Co.’s 2-year retention period would not be “wrong” but it may not be the most useful for its business. Instead, ABC Co. will want to look at a mix of factors. What is the useful life of the product? Where is it distributed? What is the potential for latent defects in the product lingering fro years unnoticed? What is the potential scope of injury, damage or loss that could be caused by the product? How useful are the records in assisting the organization in dealing with any litigation that could arise? What are limitation periods for claims based on the potential for latent problems?