The federal government on Tuesday filed a lawsuit against Omnitrax — the owner of the washed-out rail line leading to the isolated community of Churchill, Man. — while the company said it would challenge Ottawa under the North American Free Trade Agreement (NAFTA).

The government filed its statement of claim against the U.S. company for breach of contract, Transport Canada said in a news release. Ottawa is demanding $18 million, plus interest.

The lawsuit followed Omnitrax's declaration earlier in the day that it intends to ask for independent arbitration under NAFTA — alleging the federal government has "sabotaged" efforts to repair and transfer ownership of the line.

Omnitrax, which also owns the Hudson Bay Railway Company and the Port of Churchill, has been under pressure to repair the now-inoperable line after flooding washed portions of it away in May. Northern communities that can't be reached by road and have relied on the railway to supply basic necessities face skyrocketing prices for staples such as groceries and fuel.

The Denver-based company has refused to make the repairs, claiming they were "not economically feasible" and insisting Ottawa should foot the bill.

Omnitrax filed a notice of intent to submit a claim under Chapter 11 of NAFTA, which allows businesses to sue a government without first going through the country's court systems. It is intended to protect foreign investors from discrimination.

"We believe we have exhausted all available options to facilitate the repair and transfer of the HBR, port and related assets," Omnitrax president Merv Tweed said in an emailed statement.

"At every turn, our efforts have been stalled, obfuscated or ultimately sabotaged by the federal government. We view this NAFTA claim as a last resort."

Omnitrax says it wants a "reasonable arrangement to repair and transfer the HBR Port of Churchill," and if that isn't forthcoming, it will seek damages of $150 million and legal costs, according to the notice of intent.

A spokesperson for Omnitrax said no one was available Tuesday for an interview.

The federal government has made good on a promise today to sue the American owner of the broken rail line to Churchill. Transport Canada filed a lawsuit against the company today, but as the CBC's Austin Grabish reports, the company has fired back with its own legal action against the government. 2:16

Unforeseeable circumstances?

Omnitrax bought the railway from CN Rail and the now-closed Port of Churchill from the federal government in 1997.

In 2008, the federal and Manitoba provincial governments pledged $20 million to help upgrade the railway.

The contract that came with the money, obtained through Freedom of Information requests, said Omnitrax had to complete the upgrades by October 2018. That was extended to 2019.

Transport Canada said in an email to CBC News that under the agreement, Omnitrax also had to maintain and operate the rail line for 10 years after repairs were completed — until 2029.

If the company discontinues or abandons the rail line or port, Ottawa is entitled to have the funding returned, the contract says.

But Omnitrax argues recent events amount to a force majeure — a legal term referring to unforeseeable circumstances that excuse a party from fulfilling a contract — and it is unable to fulfill its contract with the federal government.

The company also says Ottawa's decision to end the Canadian Wheat Board's monopoly on western wheat and barley in 2012 drastically cut grain shipments along the Hudson Bay Railway and through the Port of Churchill because the open market allowed producers to use southern rail lines and ports, which are Canadian-owned.

Omnitrax president Tweed, as a Member of Parliament for Brandon-Souris under Prime Minister Stephen Harper's Conservative government, voted for the legislation that ended the wheat board's monopoly.

The government said late in October it planned to go ahead with legal action after Omnitrax failed to meet a 30-day deadline to fix the rail line.

The Manitoba government said in a statement to CBC News that it is reviewing the latest legal challenges, while assessing its own legal options under its separate contract with Omnitrax.

"Since the closure of the rail line, which falls under federal jurisdiction, our government has focused primarily on the safety and security of the community – mainly with respect to critical supplies of food, propane and other fuels. We remain in close contact with the Town of Churchill and Mayor Spence, including as recently as yesterday," a government spokesperson wrote in an email.

Churchill struggling amid rail service outage

Churchill Mayor Michael Spence says he's not surprised by the latest moves from the government and Omnitrax.

Spence is part of One North, a joint venture involving local governments and First Nations in the area seeking to buy the railway from Omnitrax. He said he hopes these developments don't distract from those efforts.

"We're hoping that the federal government and Omnitrax will come to a consensus that ... drawing this out does not favour communities like Churchill who depend on the rail service," Spence said in an interview on CBC's Power & Politics.

"We continue to be involved with companies that want to utilize the Port of Churchill. We see this as an opportunity," Spence said.

In the future, climate change is expected to extend the shipping season, opening up economic opportunities, Spence said.

One North recently joined forces with a competing group, the First Nations-owned Missinippi Rail Service, which was also seeking to purchase the railway and port.

Prices for food and fuel have soared as a result of the extra costs of flying in supplies or shipping them through the port. Although subsidy programs like the federal Nutrition North program and the provincial Affordable Food in Remote Manitoba program have pushed prices down somewhat, people in the community continue to struggle.

Churchill will hold a community meeting tonight about the broken rail line and the next steps.