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Earlier, it had been decided that the New York courts trounced arbitration as the forum for deciding disputes related to the contest, concluding two years of legal battles.

1 Page 1 of 6 BMW Oracle - winners of 33rd America's Cup America's Cup arbitration: what went wrong? FRIDAY, 19 FEBRUARY 2010 This week Swiss defender Alinghi lost to US challenger BMW Oracle in the 33rd America s Cup. Earlier, it had been decided that the New York courts trounced arbitration as the forum for deciding disputes related to the contest, concluding two years of legal battles. Are the two outcomes linked and should CAS be used to determine disputes in the future? Laurence Burger of Tavernier Tschanz tells the story. The America s Cup is no stranger to court battles. The story of the contest started in 1851, when a group of members of the New York Yacht Club decided to demonstrate the superiority of American yachting during the Royal Exhibition in England. The New York Yacht Club commodore suggested to the commodore of the Royal Yacht Squadron a race between the best yachts of both nations. The regatta was held on 22 August The New York vessel, appropriately named America, competed against fifteen English cutters and schooners ranging from 47 to 392 tons and finished victorious. The six owners of the yacht America later donated the Cup to the New York Yacht Club through a Deed of Gift. Dated 24 October 1887, and amended twice by order of the Supreme Court of the State of New York on 17 December 1956 and 5 April 1985, it became the core document of the America s Cup. Pursuant to the Deed, the Cup is to be held in trust under the following conditions: The cup be preserved as a perpetual Challenge Cup for friendly competition between foreign countries; Thc competition can be organised by any established Yacht Club from a foreign country ( ) having for its annual regatta an ocean water course on the sea, or on an arm of the sea; The race will take place between a yacht or vessel propelled by sails only and constructed in the country to which the Challenging Club belongs, and any yacht or vessel constructed in the country of the Club holding the Cup; Races in the Northerm Hemisphere will take place between 1 May and 1 November and in the Southern Hemisphere between 1 November and 1 May; They will be sailed on ocean courses, free from headlands. The club that owns the Cup in trust, in principle the winner of the previous America s Cup, is called the Defender. The club which first challenges the Defender for the next America s Cup is called the Challenger of Record. After the challenge, the Challenger and the Defender enter into a Protocol which sets the rules for the next race. On 3 July 2007, team Alinghi and the Société Nautique de Genève won the 32nd America s Cup, held in Valencia. On the same date, the Société Nautique de Genève received a written challenge for the 33rd America s Cup from the just-incorporated Club Nautico Espanol de Vela. The Société Nautique de Genève accepted the Club Nautico Espanol de Vela s challenge, and both parties signed the Protocol, which was publicly released on 5 July The Protocol was open to other Challengers, and the Royal Cape Yacht Club, the Royal Thames Yacht Club, the Royal New Zealand Yacht Squadron and the Deutscher Challenger Yacht Club came forward in this capacity.

Page 2 of 6 On 11 July 2007, the Golden Gate Yacht Club disputed the validity of the Club Nautico Espanol de Vela s challenge, on the grounds that it was not a bona fide yacht club and had not

Thereafter, it filed a complaint with the Supreme Court of the State of New York, requesting a declaration that the Club Nautico Espanol de Vela s challenge and the Protocol were void and that its

2 Page 2 of 6 On 11 July 2007, the Golden Gate Yacht Club disputed the validity of the Club Nautico Espanol de Vela s challenge, on the grounds that it was not a bona fide yacht club and had not performed any of the duties of the Challenger as contemplated by the Deed of Gift. Consequently, the Golden Gate Yacht Club demanded recognition as the ultimate Challenger of the America s Cup. Thereafter, it filed a complaint with the Supreme Court of the State of New York, requesting a declaration that the Club Nautico Espanol de Vela s challenge and the Protocol were void and that its own challenge was valid. On the same day that the Golden Gate Yacht Club filed the complaint, the Société Nautique de Genève initiated arbitration proceedings before the America s Cup arbitration panel, seeking a ruling as to the validity of the Club Nautico Espanol de Vela s challenge. The panel asked the Golden Gate Yacht Club to participate in the proceedings, stating that it would accept its submissions even if it elected not to submit to the panel s jurisdiction, but it refused to do so, contending that only signatories to what it characterised as an illegal Protocol had the right to participate in the arbitration. In autumn 2007, a pair of conflicting decisions were reached by the New York courts and by the arbitration panel that would shape the course of the 33rd Cup. On 7 September 2007, the America s Cup arbitration panel rendered an award holding that the panel had jurisdiction to rule on the dispute, that the Club Nautico Espanol de Vela challenge was valid and that the Protocol complied with the Deed of Gift. On 27 November 2007, Judge Cahn of the Supreme Court of New York held that the Club Nautico Espanol de Vela s challenge was invalid and that the Golden Gate Yacht Club was the Challenger of Record pursuant to the Deed. In the decision, Judge Cahn, with respect to the award of the Arbitration panel, held that: Although the arbitration panel concluded that Club Nautico Espanol de Vela was a valid Challenger of Record, that determination is not binding on this court, since there is nothing in the Deed that mandates that disputes be resolved by arbitration. Golden Gate Yacht Club is not a party to the Protocol; it was not bound to participate in the arbitration and refused to participate. Unless a party has entered into an agreement to arbitrate, and the agreement expressly covers the subject matter of the particular dispute, that party will not be compelled to forego its right to seek judicial relief. Société Nautique de Genève concedes that Golden Gate Yacht Club is not bound by the arbitration decision, or that the arbitration supplants this court s authority to resolve the issue at hand. Golden Gate Yacht Club s decision to decline the invitation to participate in the arbitration is understandable in that the Protocol for the 33rd race, drafted by the Société Nautique de Genève and Club Nautico Espanol de Vela, gave these two clubs the right to dismiss and replace the members of the panel at their discretion at any time. Judge Cahn s dismissal of the arbitration jurisdiction rested on two grounds. First, the fact that arbitration is not the dispute resolution mechanism under the Deed, and second, the refusal of the Golden Gate Yacht Club to submit to arbitration in light of the nomination mechanisms of arbitrators sitting in the panel. The New York courts are competent with respect to any proceeding for the amendment or interpretation of the terms of the Deed of Gift for the following reasons. The Deed of Gift being the instrument of a charitable trust created under the laws of New York, it is governed and construed in accordance with these laws. Consequently, it was generally admitted that any proceeding for amendment or interpretation of the terms and conditions of the Deed may be brought before New York courts.

Page 3 of 6 The Mercury Bay Boat Club v San Diego Yacht Club decision confirmed the competence of the New York courts for all matters relating to the amendment or interpretation of the Deed of Gift.

3 Page 3 of 6 The Mercury Bay Boat Club v San Diego Yacht Club decision confirmed the competence of the New York courts for all matters relating to the amendment or interpretation of the Deed of Gift. In this decision, the Court of Appeals of New York dismissed the argument made by the San Diego Yacht Club that disputes over the interpretation of the Deed of Gift should be referred to an international jury: The suggestion that a jury of yachtsmen would be the appropriate forum for deciding a question pertaining to the construction of a trust instrument established under the New York s charitable trust law is, we believe, best answered in the legal brief submitted jointly on behalf of the amici curiae, renowned yachtsmen from the United States, Great Britain and Australia and yacht clubs of undisputed standing: First, it is important to bear in mind that the issue here is not whether one vessel or another cut inside or outside a marker. The courts are not being asked to decide whether a foul was committed or to second guess on-the-spot officials by affording the loser a judicial replay of a particularly close finish. Such issues are and should be left to the yachting officials. The issue in this case goes to the fundamental nature of the America s Cup competition and calls for a judicial construction of a trust instrument which the SDYC accepted with the express understanding that the Deed of Gift shall be governed by, and construed in accordance with, the laws of New York and that any proceeding for amendment or interpretation of such terms and conditions would be brought before the courts of the State of New York. Nevertheless, following this decision, in the commencement of the 30th edition of the America s Cup - the Royal New Zealand Yacht Club the Defender - and the New York Yacht Club the Challenger of Record - set up in the Protocol of the 30th America s Cup a five-person arbitration panel in an effort to avoid the risk of disruptions. Arbitration clauses have always been included in the Protocols of the following Cups for the resolution of disputes arising in connection with the particular Cup. The jurisdiction of the arbitration panel is defined by the Protocol pertaining to the edition for which it was drafted. Consequently, the scope of this jurisdiction varies for each Protocol. In the Protocol of the 33rd America s Cup, dispute resolution was divided between the Measurement Committee, whose jurisdiction was all matters relating to the measurement of the ACC Yachts and Arbitration Bodies composed of a Sailing Jury and an Arbitration panel. The seat was New York and the rules of procedure were to be agreed upon by the Defender and the Challenger of Record. New York arbitration law remained applicable in case of a lack of agreement. The arbitration provision stated as follows: Any dispute, protest or claim arising out of or in relation to this Protocol and /or the Applicable Documents, the interpretation or breach thereof, shall be resolved by arbitration in accordance with the provisions of this Protocol, except if and where otherwise expressly set forth in this Protocol. Such arbitration shall be final and binding. The meaning of the term Applicable Documents is any document made under authority of this Protocol and includes the documents referred to in Article 2.5. The documents referred in Article 2.5 include (a) the Deed of Gift and (b) this Protocol. Therefore, once the Protocol was executed, its jurisdiction trumped that of New York courts even for matters pertaining to the interpretation of the Deed of Gift. This was confirmed by the arbitration panel. To determine its own jurisdiction, the arbitration panel of the 33rd America s Cup examined Article 23 of the Protocol, which provided that the sailing jury and the arbitration panel shall have the power to determine their respective jurisdiction upon receiving an application. In case of doubt on whose jurisdiction shall prevail, the arbitration panel shall determine jurisdiction. Its decision shall be final and binding. In addition, it examined New York s arbitration law (New York Civil Practice Law and Rules Article 75) and the US arbitration law in general. Under US law, the test, as expressed in the Supreme Court decision First Options of Chicago Inc. v Kaplan, is twofold: first, whether the parties agreed to arbitrate the particular issue, and second, what criteria shall be applied when deciding whether the parties had agreed to submit the arbitrability question to arbitration. Applying this test, the arbitration panel decided that Article 23 showed that the parties had clearly, expressly and unmistakably agreed that the arbitrators would have to decide the question of arbitrability and held that it had the power to rule on its own jurisdiction. Applying, in addition, the principle of compétence-compétence, the arbitration panel confirmed that it has jurisdiction to rule on its own jurisdiction. Articles 21, 1.1(d) and 2.5 of the Protocol provided that disputes arising out of the Deed of Gift would be resolved by arbitration. Article 22 of the Protocol provided that the competence of the Sailing Jury was to interpret provisions or resolve disputes of a sporting or technical nature arising under the Competition Regulations, the Notice of Race, the Sailing Instructions and the Racing Rules, while the arbitration panel s jurisdiction was to interpret all other provisions of this Protocol or resolve other disputes. Given that the Société Nautique de Genève s application regarded the compliance of the Protocol with the Deed of Gift, the arbitration panel held that this felt within the other disputes referred to in Article 22 of the Protocol, and that as a consequence, it had jurisdiction. The panel s award and in particular its decision on jurisdiction was well-reasoned and applied all required principles. It seems therefore, that all 33rd America s Cup disputes should have been brought before the arbitration panel. The loophole, however, that allowed the Golden Gate Yacht Club to bring the Société Nautique

But the Golden Gate Yacht Club, who saw the Protocol as invalid, refused to join and was therefore not a party to the arbitration provision.

4 Page 4 of 6 de Genève before the New York Courts was the contractual nature of the Protocol. Indeed, the Protocol was entered into only between the Société Nautique de Genève and the Club Nautico Espanol de Vela. Other Challengers could (and did) join by signing the Protocol. But the Golden Gate Yacht Club, who saw the Protocol as invalid, refused to join and was therefore not a party to the arbitration provision. The New York Courts were therefore entitled to admit its claim and rule upon it. The award of the arbitration panel became a dead letter. The dispute before the New York courts, however, continued, leading to several submissions before it. Evidently, the Protocol of the 33rd America s Cup, as entered into between the Société Nautique de Genève and the Club Nautico Espanol de Vela, gave too much discretionary power to the Société Nautique de Genève. Even the arbitration panel, constituted by the distinguished arbitrators Professor Henry Peter (chairman), Professor Luis Maria Cazorla Prieto and Graham McKenzie, suggested in the award that the provisions relating to the right to dismiss and replace the panel members, the right to change the arbitration seat, the right to change the language of the proceedings, the right to modify the jurisdiction of the panel and the right to modify the powers of the panel be reconsidered and amended. It is, however, certain that things would have been different had the issue been resolved by arbitration. The outcome of the race might not have been different, but legal disputes would have been resolved more quickly. Not for the reason that arbitration is faster than judicial determination nowadays, this is often not true. But in the specific case of the America s Cup, an experienced arbitral tribunal with the interest of the America s Cup as a sporting and therefore public event in mind would have pushed for an efficient dispute resolution, restricting legal disputes as much as possible and leaving the competition where it belongs, on the water. As a result, a proper America s Cup would probably have taken place, with a Challenger that would have won the right to meet the Defender by first competing and eliminating the other Challengers. As in previous Cups, the Challengers and the Defender would have agreed to compete on the same or a very similar type of boat, focusing the competition on strategy and boat handling. Instead, once more the court proceeding led to a Deed-of-Gift challenge with two very different boats, one much faster than the other. The 33rd America s Cup was over in two races. The current system, which can lead to parallel proceedings before New York courts and before the arbitration panel created under the Protocol, is unsatisfactory and inefficient. Parallel proceedings derail and delay the organisation of the event. Court proceedings, and in particular those in US courts, with their myriad procedures are not suitable for sport competitions that must be held every set number of years. Normative mechanisms should be put in place to avoid lengthy battles before the courts. Other world sporting events have chosen arbitration as their favoured means of dispute resolution. The Olympic Games, an event that bears many similarities to the America s Cup, and whose disputes are also submitted to arbitration, are a good example. At the Olympic Games, dispute resolution is left in the hands of a special division of the Court of Arbitration for Sport, which can resolve disputes occurring during the Games definitively within time limits appropriate to the pace of the competition. Because the Mercury Bay grants jurisdiction over the interpretation of the Deed of Gift to the Courts of New York and the current Deed of Gift provides that any club having won the Cup shall enter into an instrument in writing in which it accepts that the Cup is transferred to it subject to the said trust, terms and conditions (which implies that the laws of New York will always remain applicable and that any proceeding for amendment or interpretation shall be brought before the Courts of New York) an amendment of the Deed of Gift would be necessary to submit its interpretation to arbitration. An amendment, however, would be difficult to obtain. However, in light of the increasing importance of arbitration as a means of dispute resolution in sports events, one can only hope that those who have a role to play in the America s Cup will choose the Court of Arbitration for Sport or any well-suited arbitral institution to handle the disputes arising in connection with the Cup so that the competition regains its fame far from dark court rooms, on the ocean. In arbitration Tribunal

5 Page 5 of 6 Henry Peter (chairman) Luis Maria Cazorla Prieto Graham McKenzie Counsel to Société Nautique de Genève Lenz & Staehelin Partner Lucien Masmejan in Geneva In New York court proceedings Counsel to Golden Gate Yacht Club. Latham & Watkins LLP Boies Schiller Flexner Counsel to Société Nautique de Genève Simpson Thacher & Bartlett LLP White & Case LLP Counsel to Club Nautico Espanol de Vela Debevoise & Plimpton LLP Amici Curiae: Yacht Club Canottieri Savoia and Mascalzone Latino Friedman Kaplan Seiler & Adelman LLP

This appeal involves the preeminent international. sailing regatta and match race, the America's Cup. We had

This appeal involves the preeminent international. sailing regatta and match race, the America's Cup. We had ================================================================= This opinion is uncorrected and subject to revision before publication in the New York Reports. -----------------------------------------------------------------