A Canadian Lawyer’s Perspective on the Gordie Howe Bridge Agreement
The news has been awash of late with the US President Donald Trump blocking the opening of the Gordie Howe Bridge because in his view it was a “bad deal” despite the fact that Canada paid for the bridge.
Then there was finally an agreement between the Canadian and US Government that allowed the bridge to finally open. Donald Trump touted the deal as great for America. Mark Carney initially told the press that the word “net” was doing the heavy lifting in the agreement although he later acknowledged the new agreement would see some additional money go to the US. The Canadian Conservatives tried to paint the deal as a bad deal and suggested Mark Carney wasn’t being straight about its terms.
No one in the press seems to be able to sort out exactly what the deal means.
We decided to look at the actual legal agreements posted by the Windsor-Detroit Bridge Authority (the “WDBA”) on their website. The WDBA is the organization created to oversee the operation of the Gordie Howe Bridge pursuant to the original agreements related to the bridge between Canada and the State of Michigan.
Let’s get into it.
First, the original agreement dealing with how to manage the bridge and share revenue and expenses was an agreement between Canada and Michigan from June of 2012 entitled “Crossing Agreement”.
The beginning of this agreement contains a number of defined terms, as is common in longer commercial agreements of any kind. These defined terms set the legal meaning of whenever the word or phrase is used in the agreement going forward.
One important definitional term is “Unrecouped Canadian Contributions” which in plain speak means all of the costs of the bridge paid for by Canada that have not yet been paid back yet either from the aggregate revenue of the bridge (ie. profit or revenue after expense) or the Michigan or US government.
Another defined term is “Imputed Cost of Unrecouped Canadian Contributions”. This is defined as the amount of Unrecouped Canadian Contributions at each calendar year end plus interest at the rate of the Government of Canada benchmark long term bond yield effective on the last day of the prior calendar year plus 100 basis points, compounded annually.
To give some meaning to the interest rate amount, the current Canada long term bond yield rate as of writing this blog is 3.5%. If we add 100 basis points that is an extra 1% for a total rate of 4.5%. The estimated costs Canada spent on the bridge are $6.4 billion dollars. 4.5% of $6.4 billion is $288 million dollars in interest per year. It is also important to note that this amount compounds annually. So if no money was paid down on the $6.4 billion, it would balloon to $6.68 billion the next year, and then 4.5% interest on that would be $300,960,000.00 the next calendar year, assuming bond yield remained the same.
The agreement goes on to set out that basically Canada’s cost are paid back by revenue from the tolls on the bridge, The way the costs for the different parts of the bridge is defined is that it covers both the initial investment costs of Canada into the various parts of the bridge plus the operating costs of the bridge.
Finally, a schedule to the agreement indicates that once all of Canada’s costs (plus the interest) are paid back, then Michigan gets half the revenue as long as it agrees to be responsible for half of ongoing bridge costs moving forward. Alternatively, Michigan has the right to pay half of the bridge costs currently outstanding at time it pays them to “own” half of the bridge quicker and get its half of the revenue.
Next, we have the Trump/ Carney agreement which is also posted on the WDBA website and called “the proposed agreement in principle”. Like many agreements that involve Trump, the agreement is not something any lawyer would recognize as a fully fleshed out legal agreement but instead is a one page document which seems to set out the general principles of an agreement with the details to be fleshed out later.
This one pager specifically refers to the “Crossing Agreement” and says nothing in the agreement in principle will amend, supersede, or modify the Crossing Agreement. This means everything in the Crossing Agreement continues to apply.
Now, we get to the critical term on payment that has created all of the confusion and which no-one seems to be able to understand. This clause is worded as follows:
“Canada will provide annual economic participation payments, outside the 2012 Canada–Michigan Crossing Agreement equal to fifty percent (50%) of net bridge and crossing related revenues for the first fifteen (15) fiscal years of bridge operations. Net bridge and crossing related revenues is all revenues collected with respect to the bridge, less all incurred operating costs of the bridge. Such payments shall be made to a United States-Canada Economic Development Fund, established and solely controlled by the Government of the United States.
Breaking this wording down, we can translate as follows:
- There will be a payment from Canada outside the terms of the Crossing Agreement
- It will be equal to 50% of “net” bridge and crossing related revenues for the first 15 years of bridge operations.
- Net bridge revenues is defined as all revenues collected less all incurred operating costs of the bridge.
- The payments will go to an economic fund specifically for developing economic growth of Canada and the US.
This wording leaves massive confusion for a number of reasons:
- The original Crossing Agreement is still in effect and not altered by the new agreement in principle.
- Under the original Crossing Agreement there is no real breakdown between operating costs and the original costs Canada incurred in building the bridge and related structures, they are all designated under blanket costs definitional terms that include both operational costs and original costs of building different parts of the bridge structure.
- The payments back to Canada and the interest are also defined as imputed costs in the original Crossing Agreement.
At the end of the day, the question will come down to the definition of “operational costs” under the new agreement in principle. Does it mean the same as in the Crossing Agreement? This doesn’t seem likely, otherwise why differentiate operational costs if they are lumped together with costs of building the bridge in the original agreement. Is the cost of paying the interest to Canada considered an operational cost? The agreement in principle doesn’t say. Under generally accepted accounting principles (“GAAP”) interest is not considered an operating cost, however this term could have a different meaning under the agreement in principle.
The agreement in principle fails to define the key terms needed to properly understand what this deal means in terms of what is included in operational costs deducted from revenue that the US will participate in for 15 years.
One interesting thing we have noted that no-one is talking about, however, is that even if interest isn’t an operating cost to be deducted before the first 15 year 50% split it is still both accruing and compounding over that 15 year period if it is not being paid (or at least being paid down at a 50% lesser rate). Using the figures discussed above, 15 years of interest on the bridge even without compounding the interest is 4.32 billion dollars. 50% of that is 2.16 billion dollars. Put another way, is it really that great a deal to get paid some additional money right away that has to be invested into an expense (economic development) if you are going to end up paying far more interest on a compounding basis over the long term? It seems very possible the answer is no, although that may depend on what the return on the economic development fund actually is in reference to the compounding interest paid. Perhaps even in the best case scenario for the US under this deal they are simply funding immediate financial benefit with greater debt, a criticism increasingly levelled at the US in reference to the US national debt, which currently totals just shy of 40 trillion dollars.
The new US Canada agreement in principle is also just that, an agreement to broad strokes with the details to come. Given the erratic nature of the US administration, it is entirely possible that the entire agreement falls apart in the negotiation of the details, especially considering there seems to be different interpretations of the details being held by the Canadian and US government. Also, given this US administration has already broken the CUSMA agreement with Canada multiple times, how can Canada trust that the US will honour any agreement it enters into with Canada anyway? Given that the bridge is now open, it is hard to guess what effect the deal unravelling would have. Would the US try and close the bridge again once it is already open? This would seem to be a politically bad move, given the State of Michigan and its business community (with the exception of the owner of the Ambassador Bridge) seem to wholeheartedly support the bridge and its economic benefits. That said, the current US administration doesn’t seem to care about the political costs of its bad decisions making to date.
The other consideration is the economic benefit of the bridge opening versus remaining closed. The exact costs of this don’t seem to be possible to calculate due to too many unknown variables but all sources seem to agree that the benefits are substantial, given the massive amount of trade flowing between Detroit and Windsor.
In conclusion, it doesn’t seem possible to precisely tell what the new agreement with Canada and the US on the Gordie Howe Bridge is, given the unprecise and undefined nature of the “Agreement in Principle”. What is certain is that an important piece of international infrastructure is now open, but what should have been a symbol of unity between too neighbouring nations has now become a symbol for Canada of the racketeering gangster style foreign policy being deployed against it by its now hostile southern neighbours.
If you have questions about legal agreements please contact one of our lawyers to see how we can help you, or call us for more information: 604.380.3517