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AbitibiBowater Inc. is seeking $500-million in direct compensation and damages under a free-trade challenge to Newfoundland and Labrador's expropriation of its assets in the province.

The claim is believed to be the largest of its kind in Canadian history.

David Paterson, the chief executive officer of the insolvent forestry giant, said the company had no choice but to resort to the action after negotiations with the government fell apart earlier this week.

"Everyone worked hard and gave it a good shot," he said in an interview at head office in Montreal Thursday.

The federal government was "proactive" and tried to mediate a settlement, he said.

"It would have been nice to have had a settlement," he said.

"As a U.S. citizen living and working in Canada I've become acutely aware of the politics of this situation."

"The expropriation was detrimental to the financial position of our company," Mr. Paterson said in a statement.

"After operating in Newfoundland and Labrador for more than a century and contributing significantly to the region's economic, social and sustainable development, the nationalization of AbitibiBowater's assets was unexpected and unnecessary."

The Delaware-incorporated company, which is undergoing a sweeping restructuring under court-ordered bankruptcy protection, warned last April it intended to file a claim if the government of Premier Danny Williams failed to agree to acceptable terms to compensate the company for the expropriation of its water and timber rights and hydroelectric assets in the province.

The government rushed through expropriation legislation in late 2008 after AbitibiBowater closed its mill in Grand Falls-Windsor, putting about 800 employees out of work.

The challenge is being made under the terms of Chapter 11 of the North American free-trade agreement, which allows companies to seek compensation if they feel a government expropriation is unfair and discriminatory.

Although its head office is in Montreal, AbitibiBowater is incorporated in Delaware and has significant operations in the U.S. Thus, it claims to be eligible to file the Chapter 11 challenge, which was included in the 1994 NAFTA to protect foreign companies against unfair expropriations by member countries.

AbitibiBowater, which filed for bankruptcy protection in April of 2009, said the decline in newsprint consumption had forced it to cut its production capacity and the Grand Falls-Windsor mill was chosen for closing because of its high operating costs.

Mr. Williams has said that Newfoundland has the right to expropriate the assets under a 1905 lease agreement that states the company's rights are dependent on operating a mill in the province. AbitibiBowater is eligible for compensation for its physical assets only, says the government, and that amount will be determined by the province.

Federal government officials were not immediately available to comment on the challenge, which could take several years to be settled if it goes through the lengthy NAFTA arbitration process.

AbitibiBowater says it wants to be compensated for the fair market value of the expropriated assets, plus additional damages. As a NAFTA signatory, Ottawa would be on the hook for any monetary compensation to Newfoundland.