The U.S. Trade Representative (USTR) announced a notice of action on fees for operators of Chinese-built ships and vessel owners and operators of China after issuing a Federal Register notice proposing similar fees and restrictions on maritime transport services earlier this year. (See Holland & Knight's previous alert, "U.S. Proposes Port Fees on Chinese-Built Ships and Operators to Counter China's Shipping Dominance," March 5, 2025.)
The USTR's initial proposed rulemaking sought up to $1 million per U.S. port call on Chinese vessel operators and up to $1.5 million per U.S. port call for Chinese-built vessels. In issuing its recent notice of action, however, the USTR revised its initial proposal to have fees charged based on net tonnage per U.S. voyage as opposed to per port, with a phasing in taking place over several years after taking into account public comment. (See Holland & Knight's previous alert, "USTR Announces Streamlined Notice of Action to Counter Chinese Dominance in the Maritime Sector," April 21, 2025.)
Though the USTR's notice of action arguably represents a softening of its initial proposal, the fees are only part of the Trump Administration's broader attempts to improve the competitiveness of American shipbuilding, as announced by the administration in its executive order, "Restoring America's Maritime Dominance," on April 9, 2025. Notably, the USTR continues to seek public comment on proposed tariffs on ship-to-shore cranes and other cargo handling equipment.
Holland & Knight has received a number of inquiries whether this new wave of uncertainty in cost escalations can have a legal impact on performance obligations with vessel agreements. Though the terms of the agreements are important, there are legal doctrines to consider in concert, such as frustration, commercial impracticability and the like.
Frustration and Commercial Impracticability of Vessel Agreements
There is a limited body of authority under the general maritime law of the U.S. concerning a finding of frustration of a charter. Under long-accepted law, frustration of a charter requires that a candidate frustrating event be 1) objectively unforeseeable, 2) not already addressed in the agreement between the owner and charterer, and 3) able to render performance under the agreement impossible or "commercially impracticable." As one legal commentator observed, the third of these elements arguably presents "[t]he greatest difficulty" in establishing frustration. (See Time Charters)
In 2000, a panel of Society of Maritime Arbitrators (SMA) members observed that an event would render performance impracticable when "it could only be carried out at an excessive and unreasonable cost" – specifically distinguishing it from cases in which an event "has simply made a parties' performance difficult or unprofitable" or "economically burdensome." There, a charterer began making unilateral adjustments in its payments on the basis of commercial impracticability reasons, citing the collapse of the chemical market by 40 percent over a period of five years. Though the SMA ultimately found that there was no frustration of contract on the basis of foreseeability (i.e., the first of the elements above), the SMA's analysis is nevertheless instructive in that profitability analysis is less than decisive in determining frustration.
Outside of SMA decisions, there are a few federal court cases that provide some indication as to the kind of conditions that may yield commercial impracticability in the maritime context.
In a case from 1972, the U.S. Court of Appeals for the Second Circuit found that there was no commercial impracticability where closure of the Suez Canal resulted in the charterer taking an alternate shipping route, resulting in a cost increase of less than one-third. The court, noting that expenses must be "extreme and unreasonable," analyzed a series of other cases cited in the Restatement of Contracts (finding "extreme and unreasonable" expense where costs were multiplied by tenfold and fiftyfold) and from English law (finding frustration where there was a 50 percent increase in cost and a "highly circuitous" alternate route and finding no frustration where costs were doubled and an alternate route was taken). Though the court provides no hard and fast numbers for commercial impracticability, the court's reasoning does suggest that courts will 1) take into account increases in distance and time (as opposed to just cost) and 2) look at increases in terms of percentages of the entire contract, rather than discrete dollar or mile amounts, when analyzing commercial impracticability.
In an oft-cited case, also involving closure of the Suez Canal from 1966, the U.S. District Court for the District of Columbia found that performance on a contract was not rendered impracticable where the closure increased expenses roughly 15 percent and added 3,000 miles to a 10,000-mile voyage.
Conversely, in 1981, the U.S. District Court for the Southern District of New York found that performance by owner of a vessel was rendered impracticable, where the vessel was damaged in a collision, and the charter party required the owner to pay for repairs. In that case, the court made note of the fact that the cost of repairs was more than twice the value of the ship and that the repair – which essentially would have involved rebuilding the ship given damage to its hull – was a kind of performance by the owner "essentially different than that for which the charterer contracted."
Conclusion
Recent or future actions of the USTR or other maritime administrations will affect shipping agreements and arrangements, raising issues of commercial impracticability and frustration. The authorities show there are viable arguments that are heavily dependent on the factual circumstances as to contractual arrangements and costs impact.
