The Construction-In-Country Rule Conundrum

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A precondition of a valid challenge for the America’s Cup and a valid defence, is that the competing yachts must be constructed in the respective competitor’s country. This is a term of the Deed of Gift.

 

The Protocol for the 36th America’s Cup addresses the construction in country rule contained in the Deed of Gift pragmatically by allowing competitors to laminate the hulls of their competing yachts in their respective countries, returning the rule to the position it was during the 32nd, and 34th America’s Cups held in 2007 and 2013. A obligation to laminate only the front 2.4m of the bow of the hulls in country during the 35th America’s Cup, paid what seemed to some to be a dubious lip-service to the rule.

 

The Rule

The relevant part of the Deed reads:

 

… shall always be entitled to the right of sailing a match of this Cup, with a yacht or vessel propelled by sails only and constructed in the country to which the Challenging Club belongs, against any one yacht or vessel constructed in the country of the Club holding the Cup.

 

Origin of the Rule

The rule did not appear in the original 1857 Deed gifting the Cup, but made a first appearance in the 1882 re-write of the 1857 Deed and was carried over word for word into the current and operative Deed when in was drafted in October 1887 (The replacements of the original 1857 Deed of Gift will be the subject of a future article).

 

Why a new rule was thought necessary in 1882, was never explained by the trustee or the author of the Deed, George Lee Schuyler, but many writers have claimed it emanated from the 1876 Canadian challenger Countess of Dufferin being a copy of an American design. There were contrary views that it was not a copy, but the issue led to a recognition that there was nothing in the Deed to prevent a challenger using an American yacht to defeat the New York Yacht Club, contrary to the general intent of the Donors, which was to require a challenger to emulate their feat of 1851, by building a yacht, sailing it across the ocean to defeat the best yacht of another nation. Interestingly, if the rule did emanate from Countess of Dufferin being a copy, the new rule did not prevent the use of foreign copies.

 

1876 Canadian Challenger Countess of Dufferin

 

Problems Emerge

The rule did not cause significant concern for more than seventy-five years, until after the Deed was amended by the New York Supreme Court in 1956 to allow racing in smaller and cheaper 12 meter class yachts as post-war austerity made the resumption of racing for the Cup in the larger and more expensive J-class yachts unlikely.  Coupled with a reduction in the minimum length of yachts allowed to compete to 44’ LOA, was the removal of the Deed requirement that the competitors had to sail to the venue of the match. It was this change that opened up the possibility of competition from more distant lands.

 

In 1958, the NYYC received query from Australian brothers Frank and David Livingston whether a prospective Australian challenge could engage an American designer to design their challenging yacht. It would appear that the Club concluded the Deed did not them from doing so, but were sufficiently disturbed to close off the possibility. Rather than a quick return to the Supreme Court to again amend the Deed, the Club’s solution was the publication of the first of what would in time be, many trustee interpretative resolutions. The Resolution interpreted the word “constructed” in the Deed to also mean both “designed and built”. Any discussions concerning legality of interpreting or amending the Deed by Trustee Interpretative Resolution do not appear to have been preserved, but it does stand in contrast to the Club’s response to the issue reducing the permitted size of competing yacht  by a petition to the New York Supreme Court to amend the Deed a few years earlier. Interestingly, there must have been a conclusion that these issues could not be addressed under the mutual consent provisions of the Deed, permitting competitors to:

 

“… make any arrangement satisfactory to both as to the dates, courses, number of trials, rules and sailing regulations, and any and all other conditions of the match, ….”

 

The ultimate interpretative authority of the terms of the Deed is the New York Courts.  Where there is doubt in the interpretation of the terms of a trust a prudent trustee will seek the guidance of the Court to avoid a possible risk of liability should it’s interpretation prove to be incorrect.

 

As new technology developed, such as Dacron sail cloth, the increasing sophistication of tow tanks to test hull designs and the development of computer design tools, new additional Trustee Interpretative Resolutions were regularly adopted or revised by the then trustee to control access to foreign products and facilities. In March 2003, all existing Trustee Interpretive Resolutions were finally revoked by SNG with the agreement of the Golden Gate Yacht Club, as the then Challenger of Record, as being out of date and of doubtful legality as unauthorised (by the New York Supreme Court) Deed of Gift amendments.

 

The increasing costs of competing for the Cup has put a focus on the “construction-in-country” rule as competitors seek to save costs by the using cheaper materials and products sourced outside their country. Progressively parts of the yacht have been excluded from the rule by mutual agreement and since 2003 (the 33rd America’s Cup Deed match aside), rule has been limited to apply to hulls of yachts  and not to rigs, sails, and other components.

 

Whether this and other past mutual consent interpretations, are legitimate interpretations of the Deed, have never been tested in a courtroom, before any jury or an arbitration panel.  The closest it got to receiving one, was during the 33rd America’s Cup, after SNG and GGYC failed to reach mutual agreement on the terms of their match for the Cup and were forced to conduct the match under the default terms of the Deed. This meant the full force of the rule had to be compiled with, without being softened by mutual agreement. Each competitor accused the other of using foreign components in their yacht and both filed proceedings in the New York Supreme Court. SNG was accused of a non-Swiss engine (used to provide hydraulic  power), sails made by North Sails in Nevada.  GGYC of using a German made BMW diesel engine (also to provide hydraulic power), Italian made hydraulic equipment and the use of French designs. Their claims, however were settled after the match, before a court had an opportunity to consider and rule on the interpretation of the construction in country rule.

 

Interpretation of the Rule

 

The construction-in-country interpretative question is simply this:

 

Does the Deed require all materials and components that go into construction of a competing yacht be made in the competitor’s country or is it a lesser requirement? At one extreme, do all metals have be mined and smelted, wood grown, raw carbon fibre manufactured, computer code written, all chemicals (such as petro-chemicals) used to make materials, all the tools used in construction in the competitor’s country? At the other end of the interpretative spectrum: Would assembly of a foreign made kitset components to construct the competitor’s yacht in the competitor’s country be compliant?

 

The answer lies somewhere between these two extremes.

 

Both competitors in 33rd America’s Cup spent a lot of time analysing the issue. Eminent America’s Cup historian John Rousmaniere filed a report in the New York Supreme Court for SNG suggesting the purpose and intent of the rule was focused on the hull of a competing yacht and not on the yachts sails. Interestingly, correspondence between members of the NYYC’s America’s Cup Committee in 1980 reveals a similar view:

 

I think all of us at our meeting agreed that a suitable test in this area was our biggest problem. I think the consensus that, in today’s climate, there were certain givens—namely, it is now pointless to try and control where raw materials come from, where tank testing is conducted etc … . We are only concerned with the hull and that, even as to the hull, we don’t care where the components come from but only where they are put together to create the finished hull.

 

It is not known how the interpretation might be resolved, if (more probably, when), it becomes a serious issue in the future.  Much will depend on the circumstances. Some Cup insiders believe the Deed language only requires an analysis of the location of construction of the “yacht or vessel”, and does not extend to origin of design, tools, raw materials or components.  Others hold a more restrictive view and believe only the use of off-the-shelf foreign sourced components are permitted, and that foreign sourced commissioned components are not. The only real safe harbour for any competitor is to use only local inputs, but for most competitors this is either uneconomic, impossible, uncompetitive or all of them.

 

Globalisation of supply has reduced the number of suppliers of many components to a few possible suppliers throughout the world and this is likely to continue at a greater pace. A strict interpretation of the rule will have the effect of reducing the number of possible competitors for the Cup and end up defeating the purpose and intent of the Deed to promote friendly competition between foreign countries.

 

Is a Mutual Consent Solution Effective?

The final piece of the puzzle is whether the mutual consent clause of the Deed allows competitors to agree to ignore or modify the construction-in-country requirement in their Protocol as presently occurs? That leads to a larger question of the boundaries (if any) of what Deed permits  competitors may agree to alter (or ignore) by mutual agreement. This is something the New York Courts have given guidance, and will be the subject of a future article addressing the mutual consent clause of the Deed of Gift.

 

Deed Amendment

 

Resolving Deed interpretation questions in the heat of a competitor dispute may well not produce the best outcome for the Cup. A more considered and thoughtful jointly agreed application for interpretation or to amend the rule might be preferred. Either way, it will open up difficult questions of how best to address the inter-linked issue of competition economics and competitiveness whilst preserving an important nationality element in the competition. Any successful application to amend the Deed will likely require a high degree of rare unanimity between the Trustee (the Royal New Zealand Yacht Squadron), the New York Attorney General and others the New York Supreme Court decides to give standing, which is likely to include any current challengers for the Cup.