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Ottawa, Omnitrax trade legal blows over Manitoba railway

The Port of Churchill is seen in this file photo

Churchill Gateway Development Corporation

The dispute over a broken-down railway in northern Manitoba escalated on Tuesday, as the federal government and a U.S. rail company exchanged legal blows.

Ottawa filed a lawsuit against Denver-based Omnitrax Inc., alleging the company's failure to repair and reopen the flood-damaged Hudson Bay Railway is a violation of an agreement reached in 2008.

Omnitrax, meanwhile, served Ottawa with a notice of intent to file a claim under the North American free-trade agreement, alleging Ottawa's move to dissolve the Canadian Wheat Board in 2012 made its purchase of the railway and the Port of Churchill a money loser.

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Omnitrax says it bought the railway and port in 1997 with the expectation that grain shipments from the Canadian Wheat Board would continue. But the government's dismantling of the wheat board and its privatization in 2015 "pulled the rug out from under Omnitrax's investment" by diverting crop shipments to other railways, the company said in a notice of intent to seek arbitration, filed on Tuesday.

The government's actions have devalued Omnitrax's investments and stymied its efforts to sell the railway and port, Omnitrax alleges in its claim.

"Omnitrax would not have purchased the HBR or the Port of Churchill but for the expected continuation of the CWB business," Omnitrax said in its notice. Omnitrax said it is seeking a negotiated settlement that will repair the railway and port and transfer ownership to the government or a third party. Failing that, Omnitrax said it will sue Ottawa for $150-million.

In a statement, Omnitrax Canada president Merv Tweed called the action a "last resort" to "help facilitate an amicable resolution to the dispute."

"We remain open to the possibility of reaching an agreement with the federal government, should they demonstrate a willingness to come to the table and discuss a reasonable arrangement for repair and transfer of the HBR, Port of Churchill and related assets," said Mr. Tweed, a Conservative member of Parliament from 2004 to 2013, when he gave up his seat in the government of Stephen Harper to take the job with Omnitrax.

Ottawa's lawsuit against Omnitrax seeks the return of $19-million it contributed to the railway's upkeep, and unspecified damages.

Sections of the railway, Churchill's only land link, were heavily damaged in a May flood and remain closed. Residents and businesses are relying on air shipments for all their needs.

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"As the private owner of the line, Omnitrax had the obligation to repair the rail line when it was damaged and it is irresponsible that they have not commenced repairs," said Mélany Gauvin, a spokeswoman for Transport Minister Marc Garneau.

Mr. Garneau was unavailable to comment on Tuesday, his office said.

Omnitrax is relying on NAFTA's Chapter 11, intended to settle disputes between investors of a NAFTA country and government. Omnitrax's notice of intent is the first step in a complaint process that has been undertaken by companies such as United Parcel Service of America Corp. and Resolute Forest Products Inc.

Under NAFTA, a government is not allowed to discriminate against or treat a NAFTA-country investor less favourably than a domestic party.

Mr. Harper in 2012 ended the wheat board's monopoly on buying and selling western wheat and barley for export to allow farmers to sell their crops in the open market. The wheat board was bought in 2015 by a partnership between Bunge of the United States and Saudi Arabia's state-owned Saudi Agricultural and Livestock Investment Co.

Renamed CWB, the former wheat board now moves crops through its own network of terminals and ports on British Columbia's coast and the Great Lakes-St. Lawrence Seaway. Other grain companies have also stepped into the market, buying and selling western crops for export. Volumes sent on the HBR to Churchill plunged, a decline worsened by the loss of federal shipping subsidies, Omnitrax says.

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"When Omnitrax acquired the HBR and the Port of Churchill, it was led by the government of Canada to expect that the railway would continue to carry historical levels of grain, as it had for the past several decades. This was to form the economic base for the viability of Omnitrax's investment, upon which Omnitrax could build by diversifying and expanding the range of goods that were transported through Churchill," Omnitrax said in its notice.

"By eliminating the [CWB's monopoly] and privatizing the CWB, the government of Canada set in motion a series of economic forces which, predictably and inevitably, wiped out the economic foundations on which the commercial viability of the HBR and the Port of Churchill rested."

Omnitrax bought the HBR from the recently privatized Canadian National Railway in 1997 for $11-million. At the same time, it took over the Port of Churchill from the federal government for $10. Ottawa contributed $28-million for dredging and other repairs. Other investments and subsidies made by Ottawa amounted to inducements for Omnitrax to keep spending on the system in the mistaken belief the government was committed to the shipment of grain through the route, the company says.

Since buying the port and railway, Omnitrax says it has invested more than $100-million but never made a profit.

Churchill is a deepwater port on Hudson Bay that can handle large ships and is favoured by shippers for its fast transit time to foreign markets. However, the port is iced in for much of the year and open only from July to October.

Climate change raises the possibility the port could become more viable. The same forces, however, render unstable and flood prone the frozen muskeg over which much of the railway travels.

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