Ottawa sues U.S. Steel over Stelco promises

The Canadian government was in a Toronto court Tuesday, trying to force a U.S. steelmaker to live up to job protection commitments it made when it bought Stelco in 2007.

Last spring, U.S. Steel shut downmost of its Canadian operations in southern Ontario, affecting about 1,500 employees at mills in Hamilton and onLake Erie because of weak markets.

The company acquired those assets when it bought Stelco in 2007 for $1 billion, andU.S.Steelpledged to "maintain employment levels" at the mills in exchange for Ottawa's approval of the takeover.

But in shuttering the mills last year,the federal government says the company failed to adequately justify its failure to meet promises on production, research and development and capital spending in Canada. Both parties have refused to divulge the exact nature of those promises.

In July, Industry Canadasued U.S. Steelin federal courtfor breaching the terms ofthe takeover under the InvestmentCanada Act the first time Ottawa has done so to a companyin the act's 24-year history.

Under section 40 of the act, if Ottawa's challenge is successful, U.S. Steel could be obliged to divest its Stelco assets. Alternately, the court has the power toimpose fines of up to $10,000 a day for non-compliance.

Act 'flawed' company says

For its part, U.S. Steel lawyer Michael Barracksaid the act is "essentially flawed" because it fails to define how an investor can justify failure to meet promises it has made to the government.

"That's where the imprecision and vagueness of the statute is," Barrack said.

"How do I justify its non-compliance? How do I avoidhaving the government come and force me to sell my property? How do I behave in an acceptable way?"

The company has asked the court to throw out the case. Its constitutional challenge of the act rests on the premise that the act is quasi-criminal in nature because of the penalties it imposes on a foreign investor that fails to meet its promises, but doesn't afford the investor all the rights allowed in a criminal case.

'How do I avoid having the government come and force me to sell?' Michael Barrack, U.S. Steel lawyer

For example, Barrack argued that U.S. Steel has not been told by Clement why its 88-page explanation of why the economy prevented it from meeting its promises wasn't enough of a justification under the act.

In a criminal case, the company would have the right to know the full case against it before it had to defend itself, the lawyer said. But notin a civil case.

Hamilton, known colloquially as Steeltown, has been hit particularly hard by the slump in the industry and the layoffs that have resulted at U.S. Steel and its rival, Arcelor Mittal Dofasco.

The Ontario governmentloaned Stelco $100 million as part of its restructuring in 2005.

The hearing in front of Madame Justice Hansen continues Wednesday, when Ottawa will present its side of the story. It is not clear how early a ruling on the issue can be expected.