The legal leg of trade disruption in the Strait of Hormuz

The recent tensions concerning the Strait of Hormuz are beginning to reach far beyond just mere shipping routes. Traders and shipowners are now confronting a different kind of disruption – one that is placing increasing pressure on the legal framework underpinning global trade. 

Much of this strain stems from a common misconception that the Strait has effectively been closed. In reality, the waterway remains technically open, making the path ahead far more uncertain for those involved. 

Rather than closing outright, the Strait has instead become significantly more dangerous to navigate. While vessels are not formally prohibited from passing through, the security environment has shifted dramatically, meaning that transiting the passage now carries far more risk than ever before. 

Traders unable to deliver the demands of their contracts face a bottleneck, where whether the Strait is closed will be a question to be determined by lawyers, judges, and tribunals as claims of closure come to light. 

Contracts will be approached with subjectivity, evoking a particular ambiguity around the force majeure clauses, which frees parties from liability under extraordinary circumstances. But force majeure clauses also differ contract by contract, and for traders to deem their liabilities obsolete, their contract’s particular technical requirements have to be upheld.

Amid this period of confusion and uncertainty, traders having hesitation in picking up the phone to their lawyers have to hurry up, because the clock is ticking. 

Insurance, insurrection, and interpretations

Many insurance agreements are being reassessed or renegotiated as shipping conditions deteriorate and insurers reconsider the terms attached to maritime transits through the region. 

In practice, the situation is driven mostly by how insurers are responding to the elevated security environment. War-risk premiums for cargo traversing the Gulf have surged to levels many actors now consider commercially prohibitive. 

Rather than withdrawing cover altogether, underwriters have replaced existing policies with significantly higher premiums, forcing shipowners to decide whether the additional cost of insurance still makes a voyage financially sustainable. 

However, the economic viability of a crossing is shaped not only by the rising insurance costs in question, but also by the contractual obligations governing the shipments themselves. In many cases, traders cannot simply withdraw from an agreement because the cost of insurance has suddenly risen. Instead, they remain bound by the terms of the contract, even as the financial realities of their trade shift dramatically. 

As freight rates climb, market participants are increasingly scrutinising the agreements they signed only days earlier – contracts that, at the time, appeared quite literally watertight. Faced with mounting security risks and a cascade of logistical and monetary pressures, operators across the industry are now searching for ways to re-strategise or exit those agreements. 

It is important to remember that each settlement must be assessed on its own terms, particularly in times of conflict when commercial conditions can change rapidly – meaning each undertaking is subject to its own contextual reality. As in most areas of law, whether a contract is capable of being performed becomes a matter of contractual construction and interpretation, with the outcome often dependent on its express language. 

Only where the wording explicitly provides for such circumstances might a party be able to suspend or terminate its obligations, and even then, success is far from guaranteed. For this reason, the situation at hand has created a range of complications, leaving many parties solely reliant on legal advice from solicitors to determine their position. 

The fine print of crisis 

In these circumstances, one of the only few potential avenues available to traders may lie in force majeure clauses. These provisions allow performance to be excused if specific and extraordinary events occur, such as war, hostilities, blockades, riots, natural disasters, or major operational disruptions. Where such incidents directly prevent one side from carrying out its commitments, contractual duties may be paused or even discharged entirely. 

However, invoking force majeure is far from straightforward. The event in question must usually fall precisely within the conditions listed in the provision. Broad references to conflict or disruption are usually considered insufficient. 

An additional challenge also lies in the fact that force majeure does not exist as a standalone doctrine under English law. Unless the relevant clause has been expressly included and carefully drafted, those involved may find themselves without this avenue altogether. 

But this is only part of the picture. 

Even where a force majeure clause exists, and the relevant event appears to fall within its wording, a further question arises: does the situation actually prevent performance? 

For a party to rely on such a provision, the event must make it genuinely impossible to honour the arrangement, rather than merely making it more dangerous. Yet, meeting these conditions is only one element of the process – there are a number of practical hurdles that come with relying on such defences. 

Timing, for one, is critical. A party must notify its counterparty promptly if it intends to rely on the provision, and failing to do so within the required timeframe may make it unviable from the get-go. 

Evidence is equally important. Simply pointing to a stipulation is not enough; a trader must be able to prove and demonstrate that the circumstances genuinely prevent an agreement from going ahead. Even then, the evidence must be convincing. Documents that may seem compelling at first glance can still be rejected by the courts. 

In the case of the Strait of Hormuz, this distinction is particularly significant. Transit may now involve considerably higher risk, but the route remains navigable, meaning claims of impossibility are likely to face scrutiny. 

Finally, an additional (although more peripheral) issue arises when contracts do not specify the origin of the goods being supplied. In such instances, a buyer may argue that instability affecting a single region does not exempt compliance, as the seller could theoretically source the cargo from elsewhere.

This effectively leaves signatories with few remaining options beyond the doctrine of frustration – a threshold that is notoriously difficult to meet under English law. Courts generally show little sympathy for commercial inconvenience: rising costs, logistical difficulties, or deteriorating conditions do not, in themselves, make a contract fundamentally unworkable. 

The costs of uncertainty 

The consequences of these legal hurdles extend well beyond their immediate impact on shipping courses. As a war unfolds, the legal and contractual architecture of global trade becomes more precarious by the second. 

Contracts that were once being negotiated in stable environments are now being renewed and reorganised with immeasurable intensity. This sudden shift is already feeding through to commodity prices and is set to place considerable strain on the availability of trade finance, prompting lenders to take a more cautious stance. 

This is especially true if cash flows that were expected to materialise under existing contracts will likely be delayed, as all parties encounter financial distress in one form or another. And the legal interpretations of agreements – from force majeure to frustration – ultimately will decide who bears the loss. 

These implications are not limited to financial markets. A significant share of the world’s supply of urea passes through the Strait – a key input in the production of fertilisers. If those cargoes are withheld from the market, fertiliser prices are likely to rise, creating a knock-on effect for harvest yields and food production. 

Evidently, these developments highlight how vulnerable global trade can be to geopolitical shocks. When disruption strikes, the strain is felt not only across physical supply chains but also across the legal agreements that underpin them, forcing market participants to rely on careful interpretation and trusted advice to navigate this unexpected uncertainty.

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At first glance, a force majeure clause can appear as a cure for all. However, for that clause to be effective in relieving a trader of their contractual liability, not only does one have to demonstrate that the extraordinary circumstance existed, but they also have to prove that the circumstance has prevented their performance. 

Rather than relying on complex clauses that aren’t necessarily designed to work in their favour, traders must turn to support from solicitors.