The federal government is taking a $130-million hit to compensate forestry giant AbitibiBowater Inc. for Newfoundland and Labrador's expropriation of its assets in the province.
The settlement is believed to be one of the largest of its kind under the terms of the North American free-trade agreement's Chapter 11.
"It's extremely significant," Riyaz Dattu, a partner at Osler, Hoskin & Harcourt LLP in Toronto, said Tuesday.
"This was an action of the government of Newfoundland and Labrador and it's the federal government that had to step up and pay the damages," he said.
NAFTA's Chapter 11 allows foreign companies to file compensation claims in countries where they have investments and feel a government action - such as legislation or expropriation - is unfair and discriminatory. Even if the allegedly unfair actions were initiated by a province, it is the federal government that is on the hook if arbitration determines that compensation must be made.
AbitibiBowater, a Delaware-incorporated company that is preparing to exit from a sweeping court-ordered bankruptcy protection, filed a claim for $500-million in February under Chapter 11.
AbitibiBowater had previously warned it would file a claim if Newfoundland and Labrador Premier Danny Williams's government failed to agree upon terms to compensate the company for the expropriation of its water and timber rights and hydroelectric assets in the province.
The province passed expropriation legislation in late 2008 after AbitibiBowater closed its mill in Grand Falls-Windsor, putting about 800 employees out of work.
In a joint statement Tuesday, the Department of Foreign Affairs and International Trade Canada said the dispute was resolved "for the benefit of Canada's long-term economic interests. In reaching this agreement, the Government of Canada is avoiding potentially long and costly legal proceedings."
Had AbitibiBowater's challenge gone to formal arbitration it could have taken years to wend its way through the lengthy NAFTA process.
In a statement Tuesday, Mr. Williams said: "We are pleased that the matter has been concluded and we appreciate the work of the federal government in resolving the issue."
An official in his office said Mr. Williams would likely hold a news conference Wednesday to comment on the matter in greater detail.
In public statements at the time of the expropriation of the forestry company's assets, Mr. Williams said his government had the right to take the action it did under a 1905 lease agreement that states the company's rights were dependent on operating a mill in the province.
AbitibiBowater president and chief executive officer David Paterson said in a news release Tuesday that the deal is "an acceptable settlement for our company, stakeholders and creditors, given the set of circumstances faced by the company at this particular time as well as the inherent uncertainty of any judicial process.
"We are now able to move forward and focus on finalizing our restructuring process and plans to emerge from creditor protection in the fall 2010."
As part of the settlement agreement, AbitibiBowater will waive its legal actions and claims against Ottawa under NAFTA.
Although its head office is in Montreal, AbitibiBowater is incorporated in Delaware and has significant operations in the United States. Thus, it was eligible to file the Chapter 11 challenge, which was included in the 1994 NAFTA to protect foreign companies against unfair actions by member countries.