There are two possible explanations for why the Canadian government decided to settle rather than defend against this claim. One is that AbitibiBowater was in distress, the government wanted to provide some funding to it, and this was a convenient way to do that without creating a precedent that would cause every other company in financial straits to come knocking at its door. That's one explanation.
The other explanation is that the Canadian federal government doesn't much believe in public ownership and control of Canadian natural resources. It would rather see those privatized in every domain, from forest to water. There was no way it could proceed with a political agenda of that character, so this was a way through the back door to arrive at the same place.
What matters is not what their motives were, but what the consequences of their decisions are. Under NAFTA, Canadian governments, both provincial and federal, have an obligation to provide national treatment, which is the most favourable treatment accorded to any foreign investor in similar circumstances.
There are tens of thousands of companies operating in this country with permits to take water or harvest forests from public land as natural resources. Every single one of them, through the simple expediency of finding a foreign investor in the United States, can now tell others that they cannot recover any of the water that the company is entitled to take by permit to water its golf course, to irrigate its crops, or to bottle Coca-Cola to sell in U.S. markets, unless they pay the company, even though, until this very moment, these resources have always been understood to be public property, held in public trust by Canadian governments, for the benefit of Canadians, both present and future.
That's the consequence and that's what matters. Whether it was a diabolical plan to undo public ownership of public natural resources or just a politically expedient way to funnel money to a company in distress, I don't care. They didn't defend the case and its consequences are clear to anybody who practises law in this domain.