Insolvent pulp-and-paper giant AbitibiBowater Inc. has initiated a $500-million free-trade challenge to fight what it reveals is the illegal expropriation of its assets in Newfoundland and Labrador.

The challenge is reported to lie under Chapter 11 of the North American Free Trade Agreement.

"The company contends that the provincial government's enactment in December 2008 of Bill 75, which expropriates an extensive array of the company's rights and assets, was arbitrary, discriminatory and illegal under international law", the company posted Thursday.

AbitibiBowater claimed to seek direct compensation for damages of nearly $500 million, apart from additional costs and any relief awarded by the arbitration tribunal.

Abitibi is incorporated in Delaware and operates in the United States, however, its headquarters are in Montreal.

It contends the confiscation of its assets and rights in Newfoundland and Labrador in 2008 represents a breach of Canada's obligations to a U. S. investor under free-trade rules.

"It will be a humongous issue for the federal government", said a source, who asked not to be named because of the sensitivity of the matter.