America's Cup Appeal goes Alinghi's way

by Richard Gladwell, Sail-World on 30 Jul 2008
In a surprise decision a majority of the Appellate Division of the New York Supreme Court have determined that Club Nautico Espanol de Vela, the much discredited Challenger of Record chosen by the Defender Societe Nautique de Geneve, did comply with the requirements of the Deed of Gift.

The Court decision which did not receive the sanction of two of its senior members, including Chief Judge David Saxe, held that the words 'having it annual regatta' did, in 1896 usage mean some future action.

Additionally despite not having vessels on its registry, the Appellate Court majority held that the Club, which had just five members and had never held a race at the time of its Challenge, was in fact organised as a yacht club.

The Court determined that the use of the word 'having' was ambiguous and could mean a future and past action.

Having arrived at this conclusion the Court felt it was entitled to move beyond the four corners of the Deed of Gift and look at extrinsic evidence.

In doing so it then referred to the original challenge lodged by Societe Nautique de Geneve back in 2000 for the 31st America's Cup in Auckland which was subsequently won in commanding fashion by a Russell Coutts skippered crew.

The 31st America's Cup was held under the umbrella of Mutual Consent, with Yacht Club Punta Ala (ITA) as the Challenger of Record. Keen to get challengers on board the Defender, Royal New Zealand Yacht Squadron accepted a Challenge from the land locked Societe Nautique de Geneve in 2000, but referred it to the Arbitration Panel for the 31 America's Cup as SNG did not hold its annual regatta on 'an ocean water course on the sea, or an arm of the sea, or one which combines both'.

SNG agreed that it did not hold such a regatta, but undertook to do so, and would do so for the time that it remained active in the America's Cup. The Arbitration Panel noting that there were still 12 month remaining for the acceptance of Challenges, sent the Swiss Club away with a partial pass, provided they held a regatta within the 12 month period on an ocean course, in which case they would be in compliance with the requirement of the Deed of Gift, and after they had satisfied this requirement, then the Challenge would be accepted as being valid.

SNG did undertake this requirement (and as far as Sail-World understands has remained true to this undertaking.)

The Appellate Division picked up on this construction of 'having' and used it to construct a decision in favour of the original parties to the 33rd America's Cup.

The operative part of the majority decision by the Appellate Division of the New York Supreme Court is as follows:

In accordance with the foregoing, 'having for its annual regatta' can only be interpreted through strained English usage. If explicable at all, the phrase is subject to conflicting interpretations. We therefore hold that the Deed of Gift's annual regatta requirement is ambiguous. GGYC argued below that the participle, 'having,' in the Deed, derives its tense from the words 'shall always be entitled.' 'Shall,' however, is a word used to form the future tense (Lutz and Stevenson, The Writer's Digest Grammar Desk Reference § 1C, at 16-17). Accordingly, GGYC's argument only confirms the ambiguity of the annual regatta requirement.

A court may resort to extrinsic evidence to construe an ambiguous provision of a trust instrument (see Mercury Bay Boating Club, 76 NY2d at 267). In this instance, the Cup's recent history is a source of relevant extrinsic evidence. SNG challenged for the 31st America's Cup by letter to the Royal New Zealand Yacht Squadron (RNZYS), the then trustee, on August 18, 2000. SNG, a Swiss yacht club, is situated on Lake Geneva and, as of the date of its challenge, had never held a regatta on an ocean water course, as required by the Deed.

As a precautionary measure, SNG and RNZYS applied to the 31st America's Cup Arbitration Panel (ACAP 31) for a ruling regarding the validity of SNG's challenge and 'seeking interpretations of the Deed of Gift relating to the criteria for future challengers by yacht clubs [sic] not located on the sea or an arm of the sea.' ACAP 31 received submissions from three other yacht clubs, including the New York Yacht Club, none of which disputed the validity of SNG's challenge. ACAP 31 resolved the issue by determining that the Deed of Gift has no provision requiring the annual regatta to have been held prior to the lodging of a challenge.

GGYC attempts to dismiss ACAP 31's decision as 'unremarkable' because SNG was not the Challenger of Record for the 31st Cup but merely a so-called 'Mutual Consent Challenger.' However, the Deed itself makes no such distinction with respect to the annual regatta requirement. Adoption of the distinction would mean that a yacht club, such as SNG in 2000, could win the Cup, serve as its trustee, and defend [*6]it, but lack the capacity to be a Challenger of Record. Nothing in the Deed of Gift calls for such an incongruous result.

As noted above, the motion court did not address GGYC's argument that CNEV is not an 'organized Yacht Club,' a status required but not defined by the Deed. An entity is 'organized' if it has taken all steps 'necessary to endow [itself] with the capacity to transact the legitimate business for which it was created' (Matter of Corporation of Yaddo, 216 App Div 1, 4-5 [1926]). According to its certificate of incorporation, CNEV was incorporated as a sports entity whose purpose is to support 'sports activities practiced on the sea, and especially to promote the sport of sailing by organizing national and international regattas held in national territory.' It has an address, bylaws and a board of directors. In addition, as indicated it is registered with the Valencian Registry of Sports Organizations.

Based upon the foregoing attributes, we hold that CNEV was organized as a yacht club at the time of its challenge. GGYC cites no authority to support its argument that a yacht club must have vessels to be organized. Therefore, CNEV met the Deed of Gift's organizational and annual regatta requirements. In light of the foregoing, we need not reach the issue whether GGYC's purported challenge was deficient.

In a dissenting opinion Eugene Nardelli subscribed to the more accepted view of the America's Cup Challenge process and how this should have operated in the context of the 33rd America's Cup. It is not stated in the Decision whether Chief Judge David Saxe concurred with this decision, but one can only assume that he does, by virtue of the fact that he was in favour for upholding the Appeal of Golden Gate YC, but did not state his reasons for doing so.

Nardelli, unlike the majority of the panel, differentiated between the requirements of a Challenger of Record, and that of a Challenger to be accepted under the terms of Mutual Consent.

He (and presumably Saxe) fell on the side of the view that to be CoR, a Club had to be properly organised as a yacht club, which meant having already run yacht races, and not merely formed for the purpose of challenging for the America's Cup.

While it is true that there have been many clubs formed for this purpose in the past, leading to the description of 'paper yacht clubs', none have been accepted as a Challenger of Record, and in this respect Club Nautico Espanol de Vela broke new ground.

The dissenting decision is as follows:

Clearly, the lynchpin on which this appeal turns is the interpretation to be afforded the phrase 'having for its annual regatta' as it is used in the Deed.

Our analysis, then, begins with the well established proposition that the settlor's intent controls, and that '[l]ong-settled rules of construction preclude an attempt to divine a settlor's intention by looking first to extrinsic evidence. Rather, the trust instrument is to be co