The recent escalation of the conflict in the Middle East has brought global attention to the Strait of Hormuz, a critical maritime chokepoint through which approximately 20% of the world's oil supply transits.
Reports of military action, tolls and the blockade have raised immediate concerns for businesses reliant on oil shipments, shipping companies, insurers, and trade financiers. For clients with exposure to international commerce, energy markets, and maritime logistics, understanding the legal and commercial implications is essential.
What are the legal and commercial implications
Force majeure and contractual relief
Force majeure clauses are the first port of call for any party seeking to excuse non-performance of a contract where the Strait of Hormuz is disrupted.
Most commercial contracts contain bespoke force majeure provisions but whether the closure of the Strait of Hormuz (or the imposition of tolls) qualifies will depend on the precise language used. Broad drafting covering "war". "hostilities", "government action" or "events beyond the reasonable control of the parties" is more likely to capture the closure than narrower provisions.
Most force majeure clauses require the affected party to demonstrate that the event directly caused the inability to perform, and to give timely notice: failure to comply with procedural requirements can result in the clause being unavailable.
In addition, parties are typically expected to take reasonable steps to mitigate the effects of the force majeure event. Where alternative routing is commercially possible, the clause may not excuse performance altogether but may instead suspend obligations during the period of disruption. Impacted businesses or individuals should immediately review contracts and their obligations under a force majeure clause.
Where a contract does not include a force majeure clause, or where such clause does not extend to the triggering event, parties may seek to rely on the common law doctrine of frustration.
For example, under English law, a contract is frustrated where a supervening event, beyond the control of either party, renders performance radically different from that which was undertaken at the time of contracting. In the context of the Strait of Hormuz closure, a long-term energy supply contract premised on Gulf routing may be frustrated if the Strait is closed indefinitely and no alternative performance is possible. Given the uncertainty at present, it may be difficult to ascertain whether the closure (or the imposition of a toll rendering a transaction economically unviable) will cause a disruption in performance of a sufficiently permanent nature required to frustrate a contract.
Insurance coverage
Businesses should evaluate their marine, cargo, and political risk insurance policies. Coverage may extend to losses caused by hostile acts, embargoes, tolls, or war risks. However, insurers often impose strict definitions of "war risk" or "civil commotion", and some policies exclude events arising from acts by sovereign states.
International Maritime law
Under the United Nations Convention of the Law of the Sea (UNCLOS), the Strait of Hormuz is an international strait, granting all vessels the right of transit passage. However, military conflicts and state-imposed closures or the imposition of tolls clearly create issues with UNCLOS which complicates legal enforcement and raises questions about liability for damages or seizure of vessels.
Sanctions and export controls
Businesses must remain vigilant regarding international sanctions regimes. Any attempt to re-route shipments to territories under sanction, or trade with parties involved in the conflict, may trigger civil and criminal penalties.
Supply chain disruption
Even temporary closures can force companies to seek alternative, and potentially longer, routes increasing shipping costs and transit time. Energy-dependant industries are particularly vulnerable to price spikes and shortages. The effects of this are already painfully apparent in a number of sectors and industries.
Contractual risk
Delays in delivery may trigger penalties, claims for damages, or disputes over non-performance. Businesses should document all steps taken to mitigate losses, as evidence of proactive management can be critical in legal proceedings.
What are the key takeaways and practical steps that can be taken to mitigate the above risks
- Act quickly: review contracts immediately for force majeure clauses that may provide relief from delays or non-performance.
- Review insurance policies: confirm whether marine, political-risk, or war-risk policies cover losses caused by blockades or conflict-related disruptions.
- Stay compliant: monitor sanctions, embargoes and export controls as violations can carry serious civil and criminal consequences.
- Plan logistics: explore alternative shipping routes and contingency supply chains to minimise delays and cost increases.
- Document everything: keep detailed records of actions taken to mitigate losses, which can support potential claims.
- Seek expert guidance: complex legal and commercial risks demand proactive advice, and early consultation can prevent costly surprises.
Impact of the ceasefire
Whilst the ostensible ceasefire has provided some degree of respite to the hostilities, commercial operations remain highly uncertain.
Iran continues to exert control over the Strait of Hormuz, providing guidance on safe shipping routes and potentially charging tolls. Shipping traffic is still at a fraction of the pre-conflict levels.
The ceasefire's durability and stability is uncertain. Oil and shipping markets face continued risk. For example, even if a permanent ceasefire were announced as a result of a deal being struck, the durability of such a deal, and the related, but much needed, economic certainty this would bring, is far from clear. It is foreseeable that any deal struck could collapse quickly resulting in the Strait of Hormuz being closed again and that reigniting the disruption, delays, increased costs, and further economic volatility.
Legal and commercial planning should continue to assume to possibility of disruptions, and affected parties should carefully document timing and communications regarding performance during this period.
The closure of the Strait of Hormuz due to regional conflict underscores the interconnected nature of modern commerce. For impacted businesses, proactive legal and commercial strategies are essential to mitigate risk, preserve contractual rights, and maintain operations. In times of heightened uncertainty, expert guidance can turn complex challenges into manageable risks, ensuring that businesses remain agile and compliant.
