FROM HORMUZ SHOCK TO LEGAL FALLOUT
The shipping industry has been thrust into a state of limbo following the onset of the Third Gulf War and the subsequent closure of the Strait of Hormuz in early 2026.
In a recent webinar hosted by Messrs Halim Hong & Quek (HHQ) titled “From Hormuz Shock to Legal Fallout,” a panel of international maritime practitioners – Siva Kumar Kanagasabai of HHQ (Malaysia), Nigel Cooper KC of Quadrant Chambers (UK) and Mohammad Haireez of LVM Law Chambers (Singapore) – gave their varying perspectives from 3 key maritime jurisdictions on the situation surrounding the Strait of Hormuz and its profound legal and commercial consequences that are reshaping the global maritime landscape. The recording of the webinar can be accessed here.
This is a summary of the key themes and legal strategies discussed during the session.
A SYSTEMIC SHOCK: NOT “BUSINESS AS USUAL”
Being a major maritime choke point for world energy trade, approximately 20% of the world’s oil and liquefied natural gas (LNG) is/(was) transported through the Strait of Hormuz. Now, all that has changed – the closure of the Strait of Hormuz has significantly reduced global oil supplies and caused an exponential increase in oil prices.
As oil is our main energy source to propel economic activity, we are now experiencing the domino effect of the rise in prices of the same – commodity prices and freight rates have increased and sellers who entered into contracts pre-war are trying to get out of them to enjoy the higher prices. Ultimately, we can expect these additional costs to find their way to consumers.
Similarly, ship owners are facing higher costs with increased insurance premiums, bunker prices and other costs. They are now looking for ways to transmit these costs to charters. As a result, clients are unable to fulfil their sales contracts or to even make purchases as cargo cannot be delivered, thereby affecting the entire supply chain.
A unique challenge of this conflict is the shroud of uncertainty created by conflicting information emanating from both the media and the warring factions. While it is tempting to draw parallels to past geopolitical events to make sense of the situation and what is to come, one thing is certain – this is clearly not business as usual: what we are seeing is a war that has provided some form of a systemic shock to the entire global economy.
FORCE MAJEURE: A CREATURE OF CONTRACT
This is not just a war between the US, Israel and Iran. A war is also unfolding among contractual parties over their rights and obligations and one of the key battlegrounds revolves around Force Majeure (FM) declarations. But what are the elements necessary to establish their applicability?
- 1. Creature of Contract: As a starting point, it is imperative to be minded that FM is strictly a creature of contract under common law. This entails, quite simply, that FM must be expressly provided for in a contract to be enforceable.
- 2. Causation: Second, causation is key. It is not enough for a war to exist; the event must have actually caused the failure to perform. Following the “reasonable endeavours” test in MUR Shipping BV v RTI Ltd [2024] 2 WLR 1350, a party must show they could not have prevented the failure by the taking of reasonable steps.
- 3. Reasonableness: On the issue of reasonable actions to mitigate the event, the same is a question of fact and one does not need to go beyond the terms of the contract. In other words, reasonable endeavours generally do not require a party to perform in a “non-contractual” way, such as procuring cargo from a different origin than specified in the contract.
- 4. Notice: Lastly, in respect of notice requirements, many FM clauses have strict procedural requirements. A failure to provide prompt notice within the prescribed timeframe may run the risk of defeating an otherwise valid claim.
THE HIGH BAR OF FRUSTRATION
When a contract lacks a FM clause, parties may turn to the doctrine of frustration. This, however, is fact-specific and generally difficult to establish, the test being that:
1. the event must occur after the contract is formed;
2. the event cannot be self-induced by either party; and
3. the event must render performance physically or commercially impossible or “radically different” from what was originally undertaken.
Can a delay in performance amount to frustration? Theoretically, the answer is yes. If one were to look back at the textbooks, there used to be a presumption that the outbreak of war was a frustrating event due to the likelihood of war being of an uncertain duration.
However, relying on the “outbreak of war” as a presumption for frustration is risky in the modern context, as it appears that we have departed from the days where formal declarations of war were made and there is greater uncertainty as to duration and scale.
Delays may have significant financial consequences on short-term or single-voyage contracts. However, the party seeking to rely on frustration must be minded of alternative methods of contractual performance which would enable them to perform their contractual obligations.
Ultimately, as alluded to above, this is a very fact-specific exercise.
SAFE PORTS AND WAR RISK CLAUSES
A safe port warranty is a legal obligation, usually within a charterparty, where the charterer promises that a nominated port or berth is physically and politically safe for a vessel to enter, use, and leave without damage. It covers, among others, war risks, with the following elements:
- 1. Prospective Safety: A port must be “prospectively safe” – meaning the vessel can reach, use and return from it without being exposed to danger;
- 2. Reasonable Judgment:Under war risk clauses, an owner’s refusal to transit a dangerous area is judged by an “objective test” of reasonable judgment. Courts tend to be generous to masters, who bear ultimate responsibility for the safety of the crew and vessel; and
- 3. Insurance Costs:While owners can often pass additional war risk premiums to charterers, the UK Supreme Court in Herculito Maritime Ltd v Gunvor International BV (The Polar) [2024] UKSC 2 clarified that this does not necessarily create a “complete code” that absolves charterers of liability for other breaches, such as safe port warranties.
War risk clauses, on the other hand, are contractual provisions in marine insurance and charter parties that allocate risk costs and responsibility during armed conflicts. They permit shipowners to refuse dangerous voyages and define high-risk areas. How high is the threshold in exercising the same?
Generally, this is an objective test of reasonable judgment and is premised on the evidence as to the level of threat in the particular area at the particular time. Similarly, the tribunals and courts in England and Wales tend to be reasonably generous in their assessment of whether the master has correctly exercised their discretion. This comes as no surprise as the master is ultimately responsible for the safety of the vessel, her crew and her cargo.
COMBATTING “CONTRACT BREAKERS”
The crisis has seen a rise in opportunistic behaviour, where parties are finding ways to walk away from pre-war deals in order to capitalise on higher market prices.
While these parties are attempting to use the flimsiest excuses to terminate a contract, not every breach justifies termination. Only a breach of a “fundamental term” (which goes to the root of the contract) will justify termination. A breach of a “warranty” only gives a right to damages, not the right to terminate a contract.
Depending on the forum and the passage of title, affected parties may seek injunctions, damages, or even ship arrests. However, the panel cautioned that legal victories may result in paper awards/judgments if the counterparty is a shell company with no assets.
BEARING THE BURDEN – ESCALATING WAR RISK PREMIUMS
Another major commercial issue is the sharp rise in war risk premiums and the question of who ultimately bears the cost in a typical charter party chain.
The allocation ultimately depends on the specific war risk provisions within the charter party. Generally:
• the party bearing the risk pays for the corresponding insurance;
• shipowners typically have Hull & Machinery (H&M) and P&I insurance covers;
• charterers cover their own liability.
Standard war risk clauses often permit owners to pass the additional costs associated with transiting a war risk area – specifically the increased premiums – directly to the charterer.
However, the right to pass on costs may be contested if the war risks at the time of transit are not significantly different from those identified and accepted at the time of entering the contracts.
Further, and as clarified by the UK Supreme Court in Herculito Maritime Ltd v Gunvor International BV (The Polar) [2024] UKSC 2, the fact that owners can pass insurance costs to charterers does not necessarily create a “complete code”. In turn, paying these premiums does not automatically absolve charterers of liability for other contractual breaches such as breach of safe port warranties.
PRACTICAL ADVICE: THE EVIDENCE CHECKLIST
The panel concluded with a critical reminder: Contemporaneous evidence has the highest credibility. To prepare for the worst-case scenario where a dispute goes to court or arbitration, preserving evidence through the following measures is key:
1. Issue an internal document preservation notice
2. Secure all contractual documents (such as Bills of Lading and Charter Parties)
3. Preserve voyage and operational records (such as AIS data and vessel logs) to track real-time movements and communications
4. Document all mitigation steps (for example, in a force majeure situation, take into account whether alternative routes or a substitute port were considered)
5. Maintain a live timeline of events as they unfold
6. Involve legal counsel early to manage issues such as privilege and to avoid contractual traps
CONCLUSION: A STRUCTURAL SHIFT?
The consensus among the experts is that even if the immediate hostilities resolve, the disruption to supply chains suggest a long-term problem. Moving forward, the industry is likely to see a structural shift in how maritime risk is assessed, with a renewed focus on drafting “fit for purpose” clauses in long-term contracts to withstand geopolitical volatility.
Disclaimer: This article is for general information only and does not constitute legal advice or legal opinion. It should not be relied upon as a substitute for specific legal advice. No person should act (or refrain from acting) based on this article without obtaining advice on the specific facts and circumstances. Halim Hong & Quek does not accept responsibility or liability for any loss or damage arising from reliance on this article. Halim Hong & Quek reserves the right to update, amend or withdraw this article at any time. All rights reserved.
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About the authors
Siva Kumar Kanagasabai
Senior Partner
Head of Dispute Resolution Practice Group
Halim Hong & Quek
kumar@hhq.com.my
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Hannah Choong
Associate
Dispute Resolution
Halim Hong & Quek
hannah@hhq.com.my
