TORONTO — A law governing foreign investment in Canada is too vague to allow a company facing big fines for breaking the rules to adequately defend itself, says a major American steelmaker accused of failing to meet job guarantees.
U.S. Steel Corp. is being sued by the federal government for allegedly breaking employment and production promises it made under the Investment Canada Act when it acquired the former Stelco more than two years ago.
But the company filed a court challenge arguing the act violates its constitutional rights.
In new documents filed with the Federal Court, U.S. Steel elaborates on the reasons for its constitutional challenge, arguing that companies that fail to comply with promises made under the act face punitive fines of $10,000 a day or even divestiture of their Canadian business, but aren’t given the chance to mount a proper defence.
“The penalties bear no relation to actual losses suffered,” U.S. Steel writes in its court filing. “The greater the jeopardy, the greater the protections that must be afforded.”
U.S. Steel is highly critical of the Investment Canada Act, calling it an “invalid law that violates fundamental principles of constitutional law, due process of law and natural justice.”
The act says foreign companies that violate undertakings, or promises, made when they invest in Canada should be let off the hook if they can prove that their non-compliance was the result of events beyond their control.
But U.S. Steel says the act doesn’t define what constitutes events beyond the control of the investor, and therefore leaves the company unable to defend itself properly.
The Investment Canada Act came into force in the mid-1980s when the Conservative government of Brian Mulroney scrapped the previous law, called the Foreign Investment Review Act, or FIRA, which had been passed by the Trudeau government in the early 1970s.
The Tories viewed the former law as too restrictive and eased the conditions on potential foreign takeovers, changing the test of “significant benefit” to one of “net benefit” as a condition for approval.
Since 1985, all of the more than 1,500 reviews undertaken by the Minister of Industry under the Investment Canada Act have been approved.
Given the federal government’s track record under the foreign investment law, it was a surprise that Industry Minister Tony Clement sought legal remedies under the act when U.S. Steel shut down most of its Canadian operations in March.
It’s common for such legislation to allow room for a judge’s interpretation of how it should be applied, said Richard Powers, assistant dean of the University of Toronto’s Rotman School of Management and an expert in corporate law.
“Oftentimes the legislation is written to allow for interpretation in a variety of different situations,” Powers said.
“So the fact that it doesn’t specify exactly what accounts for non-compliance doesn’t necessarily support their argument. It’s all going to come down to a judge’s interpretation of the legislation.”
U.S. Steel says it was forced to shut down most of its Canadian operations — which include plants in Hamilton and Nanticoke, Ont. — due to the recession, which “significantly adversely affected” the company and its customers. The steelmaker shut down some, but not all, of its U.S. operations at the same time.
The company says it sent Clement an 88-page response detailing the effects of the recession on its business after it was first accused of failing to live up to its promises, but the only response it received was notice that it was being sued in Federal Court.
The government wouldn’t comment on the allegations as the case is before the court, but said it will file a written response on Dec. 4. A hearing for the constitutional challenge is scheduled for Jan. 11 and 12 in Toronto.
Ottawa is taking U.S. Steel to court over allegations the company broke promises when it shut most of its Ontario operations this spring.
This case marks the first time the act will be tested in court, and U.S. Steel hopes the judge will rule that parts of the Investment Canada Act are unconstitutional and will dismiss the lawsuit against the company as a result.
As of May, the workforce at U.S. Steel’s Canadian operations had shrunk to only 23 per cent of the more than 3,000 workers it promised to employ when it took over Stelco, according to a legal application made by the federal government.
Since then, 800 workers have been recalled to the Hamilton plant, while 900 workers in Nanticoke remain locked out after the union and company failed to agree on a new contract.
Demand for steel plunged because of the recession and troubles in the North American auto sector, but many U.S. Steel mills south of the border remained open while the American steel producer shut down most of its Canadian operations in Hamilton and at Nanticoke on the north shore of Lake Erie.
U.S. Steel, an iconic Pittsburgh-based company that traces its beginnings to legendary financier Andrew Carnegie more than a century ago, admits that it broke the employment and production promises it made when it acquired Stelco.
But the company said it had no choice given the state of the economy and the unexpected plunge in the North American steel industry.