From what I can tell that tile the AI settled on was not owned by you. Let me know if I am incorrect.
Assuming it wasn't inside your borders then it is fair game for the AI to found a city there. We wouldn't want declaration of war every time someones ZoC expands and pushes someone elses borders. It would seem arbitrary and confusing. The intention is that there is some friction from close borders (I'm looking at you Canada).
What you consider an act of war is yours to determine, go to war for it. I have gone to war for much less (including liberating iron mines), but we wouldn't want to force war because of it.
I guess the weird thing for me is that we had close relations and a non-aggression pact, and this isn't how you make friends. But I can understand what you're saying. I think at the very least we need some sort of indication that someone has crossed our borders. I thought Markin had actually listened to me when I told him to piss off for the 5th time, but next thing I know, theres his new city in the middle of my territory.
And now that hes settled there, I can't attack him because of the non-aggression pact we have.
