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America's Cup: Late Entry disputes head for Arbitration Panel

by Richard Gladwell Sail-World NZ 8 Feb 05:34 PST 9 February 2019
In better times - Emirates Team New Zealand and Luna Rossa have a practice race in the AC72's off Takapuna Beach ahead of the 2013 America's Cup © Richard Gladwell

Further to yesterday's publication of the first Decision by the America's Cup Arbitration Panel, Emirates Team New Zealand have confirmed that there are other cases pending before the three-man Panel.

On November 30, 2018, Emirates Team New Zealand announced that eight Late Challenges had been received, two of those Challenges were unconditional, and were obliged to be accepted by the Defender, if they complied with the other provisions in the Deed of Gift and Protocol. These centre around whether the club is of a certain size, organised as a yacht club a legitimate yacht club, and has an annual regatta on the ocean or an arm of the sea. Most yacht clubs in the world that sail on the sea would comply with these conditions. They are not onerous.

The third Challenge from a new Challenger, Team The Netherlands came with conditions. One of its clubs is older than the America's Cup itself.

Post November 30, it was evident from interviews with the new Challengers, the lateness of the Notice of Challenge, and the content of their websites, that there were issues with their Challenges which could require adjustments to the Protocol governing the 36th America’s Cup.

Those changes must be agreed between the Defender, Royal New Zealand Yacht Squadron (RNZYS) and Challenger of Record (CoR), Cicolo della Vela Sicilia (CVS).

Challenger of Record appears to be questioning the acceptances of one or more of the Challenges by the Defender.

The Italian club, as Challenger of Record is required by the Protocol to represent all Challengers whose Notices of Challenge have been accepted. Given the Challenges have all been accepted by the Defender, the six Challengers are represented by CVS.

Hypothetically, if first entered three teams (the so-called "Super Team"s) have their Challenges Accepted and three teams (the Late Challengers) also have their Challenges accepted - then it is 3-3 and the Challenger of Record must represent both groups equally.

Whatever the split, the CoR should not be a party to the majority squashing the minority. So Luna Rossa and CVS have a very delicate path to tread in their role as Challenger of Record.

Luna Rossa will remember how they were treated in 2013 America's Cup when the Challenger of Record (Artemis Racing) sided with the Defender, Oracle Team USA and took several cases to the International Jury against the two Challenges ETNZ and Luna Rossa.

Rising tensions

A piece in the Italian newspaper La Stampa, last Friday claimed that tensions have been increasing between Challenger of Record, Luna Rossa and the Defender.

"The point of friction would be the acceptance of one or more Challenging teams with an extension of payment of the fees foreseen by the Rules," says the auto-translation of the Italian report.

"In short, the challenges would have been accepted without having been paid all the money required for registration within the relevant deadlines."

The style of the report is similar to earlier ones that have been published in La Stampa, attributed to Luna Rossa, which have disclosed that the yacht to be used in the 36th America's Cup would be a monohull and that a wingsailed catamaran would not be chosen.

Rumours of a widening rift between the two Protocol signatories have been circulating in America’s Cup circles for weeks.

Some cryptic comments in the Emirates Team New Zealand statement of November 30, last year raised some initial questions. Then there was the La Stampa report last Friday, and on Thursday there was public publication, of the Arbitration Panel decision on the Nationality interpretation - kept secret for seven weeks.

That timeline indicated that all was not well, prompting Sail-World to question the Defender as to whether there were further actions lodged with the Arbitration Panel. Earlier the Defender was question on five different points, promised an answer to the first two, earlier in the week, in a press release that was not issued.

Emirates Team New Zealand responded to a second query on Wednesday. They partially confirmed the La Stampa story and the issues referenced by the well connected Italian journalist Fabio Pozzo in La Stampa.

“Further to your enquiry, the Defender confirms there is an AC Arbitration Panel case underway involving applications in relation to requested Protocol Amendments and the validity of Late Entry Challenges.

"Under the Arbitration Panel rules, the proceedings are confidential, and no further comment will be made by the Defender until the decision is issued, which is expected to be sometime in the second half of April.

"Unlike AC35, all Arbitration Panel decisions will be published and available to the media and public,” the America’s Cup champions added.

RNZYS and CVS, were the original signatories to the Protocol that contained a number of flaws which have been highlighted by recent events.

One of these was the lack of a definition over Nationality which has now been resolved by the Arbitration Panel.

It is also clear that once the initial round of entries closed on June 30, 2018, that the Protocol contemplated Late Entries trickling in over the five intervening months until the final closing date of November 30, 2018.

Instead the Royal New Zealand Yacht Squadron received a further eight Challenges on November 30, including three in the five minutes before the official closing time of 5.00pm.

RNZYS were faced with a situation which has never before occurred in the America's Cup and for which there was no precedent to follow.

One thought, given that Entry Fees were due, was to get all eight Challengers to post a $1million fee into an escrow account, which would be held by RNZYS, while the eight Challenges were vetted by RNZYS (who operate completely of the Challenger of Record) in this regard. That process would have sorted the well financed teams from the less so.

The issue which has given rise to the complaint to the Arbitration Panel is ostensibly over the dates for the payment of Entry Fees. The Defender stands accused of being too generous.“There is talk of tensions between the Challenge of Record and the Kiwis regarding the acceptance of some challenges and the possibility that deferred payment has been granted for registration,” says the opening headline in La Stampa.

Nonsensical payment timeline

Under all versions of the Protocol, of which there is the original and two substantial amendments running to several pages, the date for the first half payment of the Entry Fee of USD$2million was ten days after the acceptance of the Challenge by the Defender.

However the Protocol also provided for the payment of the second half of the Entry Fee to be on November 30, 2018 - the same day as late Entries closed.

The nonsensical situation is the Protocol required the three late entry Challengers to pay the second half of their entry (November 30, 2018) before their first payment was due (December 10, 2018). The three Late Entries were also make required to pay the second half of their entry fee of $1million even before they had been advised that their Challenge had been accepted. Further their Late Entry Fee of USD$1million was due on December 31, 2018.

As the Protocol stands, for a Late Challenger that’s USD$3million in the first month, plus a Performance Bond to the value of a further USD$1million also by December 31, 2018.

The Protocol also prescribes that all entry fees once paid are non-refundable. A Performance Bond is refundable only on the satisfaction of certain conditions, one of which is that the team has to at least start one race.

That's a cool $4million in cash and kind - all non-refundable by December 31, 2018.

Obviously the Super Teams would claim that the Late Challengers could have been better prepared and lodged their entry early. However this 36th America's Cup is sailed in a new AC75 monohulled foiler - the likes of which have never been seen before in sailing history. Obviously there was some degree of scepticism that the concept would work. It wasn't really until New York Yacht Club's team launched their 38ft foiling prototype in early November that the concept was proven and Late Entries had the confidence to put their Challenges into gear.

Do as I say, not as I do

The inflexible approach currently being taken over Entry Fee payment and dates contrasts with a Protocol change put through on August 24, 2018, which gave each of the three Challengers entered a further two months to pay their $1million Performance Bond - extending the original date from July 31 2018 to September 30, 2018.

While the initial group of Challengers were given some leeway on Performance Bond payment dates, that same latitude was not extended to the Late Entries, whose deadline for payment remained locked at December 31, 2018 just one month after the Entry deadline.

Representatives from the Challenger of Record flew to New Zealand in mid-July where representatives from Team New Zealand told the Mediation Hearing called to get mutual agreement on a myriad of planning issues relating to the America’s Cup bases, that they were talking with five or six teams beyond the three that had already entered at the end of June. A target of objectors at the Mediation Hearing was to get the Hobson Wharf extension stopped, which would have required Luna Rossa to have its base on Wynyard Point along with the other Challengers.

A statement from Team New Zealand supported by another from the sailing fraternity, convinced the Mediation Hearing that the matter had dragged on too late, and that a retraction of the Hobson Wharf extension was not an option.

It was clear in mid-July that there would be Late Entries, but no attempt was made by the Super Teams and Defender to rectify the Entry Fee/Late Fee/Performance Bond dates to be more reasonable and workable timeframe.

Emirates Team New Zealand - Luna Rossa's Max Sirena - Parade in  Auckland,   July 6, 2017 - photo © Richard Gladwell <a target=www.photosport.co.nz" />
Emirates Team New Zealand - Luna Rossa's Max Sirena - Parade in Auckland, July 6, 2017 - photo © Richard Gladwell www.photosport.co.nz

Two out, or just pay up?

Ordinarily, it would be expected in, the spirit of the Deed of Gift, for the America's Cup being "a perpetual Challenge Cup for friendly competition between foreign countries" that wiser heads would have prevailed and by mutual consent worked out an arrangement between the parties, rather than having to resort to the Arbitration Panel for a ruling/interpretation.

In a similar situation in the 2013 America's Cup World Series, Green Challenge was the subject of a complaint to the International Jury over non-payment of costs. The response of the then Jury, two of whom are on the current Arbitration Panel, was to give Green Team an additional couple of weeks to make the reparations. A similar approach would appear to be equitable in the current case.

There is provision in the Protocol for the Arbitration Panel for the issue to be resolved by Mediation undertaken by the Chairman. If that was not successful then the matter proceeds to a regular dispute. It is also possible for one of the Challengers to take their own case to the Arbitration panel against the Challenger of Record.

It is a very messy situation which has apparently been triggered by the Challenger of Record, and clearly a team which had not paid USD$3million plus lodgement of the Performance Bond by December 31, 2018.

The comments in La Stampa, checked by Sail-World with an Italian speaker for translation accuracy, indicate that there is an objective of having the entry of two teams rejected.

“The point of friction would be the acceptance of one or more challenging teams with an extension of payment of the fees foreseen by the rules”, says the La Stampa story.

While a possibility, exclusion from the 36th America’s Cup is an extremely unlikely outcome - given the circumstances of the late entry and the flaws in the Protocol.

It would also be seen by many as a churlish action aimed at sabotaging the 2021 America's Cup.

The Protocol does not provide for a percentage financial penalty for late payment of fees. However Article 53.10 provides, in the absence of a specific penalty, that the Arbitration Panel "shall determine and impose such penalty as it considers appropriate having regard to the nature and manner of the particular breach."

It would seem at worst that at worst the Late Entries will cop a financial penalty, if at all, and it would require a very compelling argument to persuade the Arbitration Panel to throw a Challenger out of the 36th America's Cup.

Launch of the new Luna Rossa AC72 wingsailed catamaran on Friday, Oct. 26, 2012, in Auckland, New Zealand, Miuccia Prada and Patrizio Bertelli - photo © Carlo Borlenghi/Luna Rossa <a target=www.lunarossachallenge.com" />
Launch of the new Luna Rossa AC72 wingsailed catamaran on Friday, Oct. 26, 2012, in Auckland, New Zealand, Miuccia Prada and Patrizio Bertelli - photo © Carlo Borlenghi/Luna Rossa www.lunarossachallenge.com

Design package concerns

Two more issues could also be driving the action before the Arbitration Panel - using the Trojan Horse of entry payments and deadline adherence.

First of these side-issues is the willingness of the Defender to supply a basic design package to the three late challengers. In the 2013 America's Cup Emirates Team New Zealand supplied Luna Rossa with a design package, for a fee (said to be $5million), enabling the late entry Italian team to catch up valuable time and giving the Italian team a base on which to continue on to the 2017 America's Cup.

In a media release at the time, Patrizio Bertelli, Team Principal of Luna Rossa Challenge 2013, declared: “I am certain that the co-operation of Luna Rossa with Emirates Team New Zealand will produce excellent results, giving to both teams a faster and more effective development both in the technical and in the sporting fields."

It seems that a similar philosophy could well be applied to the provision of a design package to the three late entry teams.

While a design or technology relationship between Defender and Challenger is unusual, and outside the character of the America's Cup, it has been the practice in the last two America's Cups.

The 2021 America's Cup is still a rebuilding exercise for the event which suffered mightily through the 2007-2010 New York Supreme Court case. Competitors dropped from 12 teams in Valencia in 2007 to just four in San Francisco in 2013.

On that basis there is some leeway for design assistance for startup teams who are new to the foiling and apparent wind sailing game.

In a report featured in Sailing World with the doyen of sailing correspondents, Bob Fisher, interviewed Ineos Team UK CEO and skipper, Ben Ainslie. “Six teams on the starting line (of the Prada Cup) would be good. It doesn’t give us a better chance of getting through, because some of them will have government funding, and strangely that means more money into the Kiwi’s war chest, and that is certainly helping the Defenders,” the five-time Olympic medallist said.

Ainslie's America's Cup campaign is backed by the largest single sponsorship in the sport of sailing.

Part of the issue with Team New Zealand’s design package offer could be that payment is helping to fill the Defender’s campaign coffers.

The situation between Team New Zealand and the three Challengers is different from the close relationship between Luna Rossa and Team New Zealand in 2013, and Oracle Team USA and Softbank Team Japan in 2017.

The 2021 America's Cup relationship will not involve the Defender sailing with the Challenger(s) as happened in 2017. Nor will it involve the swapping of performance data as contemplated in 2013 - which was stopped by an International Jury decision after a complaint by Oracle Team USA and then Challenger of Record Artemis Racing.

Two of the so-called Super Teams did not compete in the 2017 America's Cup and the third Ineos Team UK has undergone a complete clean-out, so they would have little to offer Late Challengers by way of a design package until they have a proven design pedigree.

While the design supplied by Team New Zealand will be of a working AC75, it is most likely to bear much resemblance to their race boat.

The keenness of the late Challengers to pick up a design package is an understandable reaction to the fact that the three Super Teams managed to get early financial backing and hoovered up the top sailing and design talent.

That made life difficult for the late entry teams - who are the future of the America's Cup. They are also fully cognizant of the statistic that says no first time Challenger has ever won the America's Cup (aside from Alinghi in 2003, for reasons that still rankle with most Kiwi America's Cup fans).

It is key to all Teams’ long-term plans to get as far up the America’s Cup learning curve as possible in the 2021 Prada Cup.

Malta gets a boost

The keenness to go to the Arbitration Panel could also lie in the knowledge that Malta Altus Challenge had achieved a significant and very favourable ruling on another flaw on the Protocol - that of lack of definition of "nationality".

Most had read the Protocol in the way that 100% nationality was required of all members of the Sailing crew using one of two methods.

The Dates are critical - the Malta Altus Challenge application was dated December 6, 2018, and the Decision came out on December 20, 2018. Two of the Super teams replied on December 15 and 17.

"While the respective Responses had different views on the approach to this Case neither disagreed with the interpretation conclusions provided for in the Application," the Arbitration noted in its Decision.

In other words, it was recognised that there was flaw in the Protocol, and that Malta Altus Challenge was correct in its view. Significantly Luna Rossa is not recorded as responding. It may well be that they realised that the game was up on nationality and an approach from another angle was required.

Along with the design package availability, flexibility on entry payments, and now the ability to pick up a multi-national sailing team, more balance has been added to the Late Challengers’ end of the America's Cup see-saw.

Of course, there are big downsides for Auckland and New Zealand if the Challenger team numbers were reduced, resulting in the economic spend dropping significantly, along with reduced TV viewership numbers.

In Emirates Team NZ’s statement of November 30, 2018 announcing the fact that eight late Challenges had been received, the Defender noted: "should less than three of the late challenges be accepted, the Government and Council will then have the option of not proceeding with the Hobson Wharf extension for the 36th America's Cup, which would result in considerable cost savings."

In a second report in La Stampa click here to read. Their key point says the rules must be the same for all

"It should be added, to close, that there were challenges such as that launched by the Yacht Club of Imperia that - solid or not - were left outside the door because they were unable to pay the fees within the fixed deadlines. But if an extension of payments has been granted to other challenges, then the rules are not the same for everyone."

By the same token Artemis Racing a very multi-national team, who performed very impressively in Bermuda, could well have continued into the 36th America's Cup had the sailing team been able to obtain Swedish passports.

However this situation plays out, the matter is now in the hands of the Arbitration Panel instead of being resolved amicably around a conference table, between the Challengers themselves.

The Passport only interpretation could also activate a bidding war for sailing team members - hiking salaries and costs.

A decision is expected to be made in late February, with publication shortly afterward.

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