Revolutionizing Judicial Interpretation of Charitable Trusts: Applying Relational Contracts and Dynamic Interpretation to Cy Pres and America’s Cup Litigation

In 1987 New Zealander Michael Fay shocked the yachting world by challenging the San Diego Yacht Club (SDYC) for the America's Cup with yachts not used in Cup races since the 1930s. Even more surprising was the New York Supreme Court's literal interpretation of the Deed of Gift, the document that established the charitable trust which defines and controls America's Cup competition. The court rejected the SDYC's petition for cy pres modification and upheld Michael Fay's challenge. This decision terminates the long-standing procedure for conducting Cup races, and interrupts the SDYC's plans for a 1991 multinational America's Cup regatta off San Diego's coast. The court's decision has created great uncertainty about the future of the Cup. Moreover, it is not at all clear that the court's decision was either sound as a matter of policy or compelled by law.

Using the Cup decision as a focal point, this Article evaluates the doctrine of cy pres modification in light of recent developments and suggests how the Deed of Gift should be interpreted to ensure that future Cup matches are open to all potential challengers. More importantly, this Article examines problems presented by "traditional" court interpretation of charitable trust instruments and proposes a significant expansion of the cy pres doctrine that should be modeled on the theory of dynamic statutory interpretation. The trust relationship is examined critically to establish the appropriate paradigm for resolving interpretive disputes that often arise long after the settlor's death. By characterizing the relationship of the beneficiary and the trustee of a charitable trust as an economic one founded in part on relational contracts, the appropriate standard of care-good faith and fair dealing-is established. Such a relational arrangement supports the application of dynamic interpretation. By looking to "public law" scholarship, insight is gained into the treatment of private agreements that have a public "flavor."

Part I presents the unique history and evolution of the America's Cup races and concludes with an examination of the New York Supreme Court's Mercury Bay decision. This Part sets the factual stage for an analysis of charitable trusts and the proper interpretation of trust terms in light of changed conditions or circumstances.

Part II focuses on the often maligned doctrine of cy pres modification. Part II demonstrates that the current underutilization of the equitable cy pres doctrine results in the suboptimal use of charitable resources. Instead, courts should expand cy pres modification to take into account the interests of all parties in the transaction, including the community's interest in the efficient utilization of charitable trust assets. This Part presents arguments that courts should interpret charitable trusts liberally in light of changed conditions to promote the maximum and efficient use of resources.

Part III presents novel theories to be applied to interpretive problems of charitable trusts. An analysis of the relationships among settlor, beneficiary, and trustee reveals that courts should treat these specialized, potentially infinite arrangements as a species of relational contracts. As such, the parties should be subject to certain "good faith and fair dealing" requirements. Moreover, the examination of these arrangements as relational contracts yields insight into techniques taken to resolve interpretive problems. The lack of a principled basis for the application of cy pres that correctly balances the disparate interests of the settlor, the intended beneficiaries, and the community's interest in the efficacious utilization of charitable trust assets precipitates the cy pres and charitable trust interpretive dilemma. Dynamic interpretation, which thus far has been limited to statutes, provides a principled basis for an expansive and optimal use of cy pres. What at first appears to be an odd coupling reveals itself as an effective way to analyze certain private law problems.