Introduction
The closure of the Strait of Hormuz presents a significant legal challenge for parties engaged in international trade. As a key maritime corridor for global shipments of crude oil, liquefied natural gas (LNG), and commercial cargo, its closure disrupts established shipping routes, delays cargo delivery, and exposes contracting parties to potential liability under a range of commercial agreements.
From a legal perspective, such disruption raises critical questions regarding contractual liability, risk allocation, delay penalties, and the applicability of force majeure. The impact is not uniform; rather, it varies depending on the contractual role of the party, i.e., supplier, buyer, or carrier, and the governing law of the contract.
The Role of the United Nations Convention on the Law of the Sea (UNCLOS)
The Strait of Hormuz, shared between Iran and Oman, is classified as a strait used for international navigation under the United Nations Convention on the Law of the Sea (UNCLOS). While international law generally guarantees the right of transit passage, practical enforcement may be limited during periods of conflict.
Consequently, commercial parties cannot rely solely on international law protections and must assess their contractual frameworks, such as Incoterms and charterparties, and applicable governing laws to determine their rights and obligations in the event of disruption.
Incoterms and UAE Law
Under international sale contracts, Incoterms are used to allocate responsibilities, costs, and risk between buyers and sellers.
For example:
- In FOB (Free on Board) contracts, risk transfers to the buyer once the goods are loaded onto the vessel at the port of origin.
- In CIF (Cost, Insurance, and Freight) contracts, risk transfers to the buyer once the goods reach the destination port.
Therefore, the choice of Incoterm is critical in determining each party’s obligations.
Impact on Sellers
In CIF contracts, sellers are typically responsible for producing goods and delivering them according to specified contractual terms, including delivery dates and transport arrangements. Where delivery obligations require shipment through a specific route or within a defined timeframe, the closure of a critical strait may make timely delivery impossible.
In such circumstances, sellers may face claims for:
- Late performance;
- Breach of contract; or
- Failure to deliver.
Therefore, they may seek to rely on contractual defenses such as force majeure or hardship if the disruption arises from circumstances beyond their control.
Article 273 of Federal Decree-Law No. 5 of 1985 (The Civil Transactions Law) states:
“In bilateral contracts, if a force majeure arises that makes the performance of the obligation impossible, the corresponding obligation shall be extinguished and the contract ipso facto rescinded.”
Additionally, Dubai Court of Cassation judgments 101/2014 and 49/2014 have clarified that an event is classified as force majeure if it is:
- Unforeseeable; and
- Unavoidable.
However, this does not automatically relieve parties from all responsibility, as the principle of good faith must still be upheld.
Article 246 of the Civil Transactions Law requires that contracts be performed in accordance with their contents and in a manner consistent with good faith. This includes:
- Acting honestly and fairly;
- Taking reasonable steps to mitigate loss; and
- Cooperating with the counterparty in addressing the consequences of the disruption.
Furthermore, Article 249 of the Civil Transactions Law states:
“If public exceptional unpredictable circumstances shall arise, and their happening has resulted in making the execution of the contracted obligation, if not impossible, has become burdensome to the debtor in such a manner as to threatening him with heavy loss, the judge may, according to circumstances and by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void.”
This allows for the obligations of a party to be reasonably reduced where exceptional and unforeseeable circumstances render performance excessively onerous, even if not impossible, thereby permitting judicial intervention to restore contractual balance in light of the parties’ respective interests.
Ultimately, the availability and scope of these defenses depend on the specific wording of the contract and whether the disruption falls within the contractual and legal definition of force majeure.
Impact on Buyers
Buyers also face substantial legal exposure when shipments are delayed due to transport disruptions.
For example, FOB contracts place a higher burden on the buyer as they are responsible for:
- Nominating and hiring the vessel;
- Paying freight costs; and
- Arranging insurance.
As a result, buyers may also face claims for:
- Late performance;
- Breach of contract; or
- Failure to deliver.
While they may rely on force majeure, its applicability will depend on the particular facts of the case, the principle of good faith, and exceptional circumstances as highlighted above.
The principal issue for buyers is that, unlike sellers, they are often exposed to indirect liabilities arising from their position within the supply chain.
Delays in receiving goods may prevent them from fulfilling obligations under separate agreements with third parties, potentially leading to multiple claims across different contractual relationships. This is particularly significant where buyers operate within tightly integrated supply chains or rely on just-in-time delivery models.
Therefore, buyers may incur additional commercial losses such as:
- Business interruption;
- Loss of profits; or
- Damage to commercial relationships.
This may occur even where the initial disruption originates upstream.
Thus, the extent of such exposure will depend largely on the contractual allocation of risk and the structure of the buyer’s downstream obligations.
Impact on Carriers
Carriers operating under contracts of carriage face complex legal considerations when a key maritime corridor becomes unavailable.
Their obligations are typically governed by:
- Charterparties;
- Bills of lading; or
- Multimodal transport contracts such as the FIATA Bill of Lading (FBL).
Under a charterparty agreement, the carrier may be obligated to transport cargo within a specified timeframe or via particular routes. If a navigational route becomes inaccessible, the carrier must assess whether alternative routes are commercially reasonable and consistent with the terms of the contract.
In such circumstances, carriers may rely on contractual provisions such as:
- War risk clauses;
- Deviation clauses; or
- Force majeure provisions.
These may justify delays or rerouting. However, failure to take reasonable steps to mitigate delay could result in liability.
Bills of lading issued under international conventions often incorporate exceptions for events beyond the carrier’s control, including:
- Navigational hazards;
- Acts of public authority; or
- Circumstances affecting safe passage.
Under UAE Maritime Law (Federal Decree-Law No. 43 of 2023), carriers may also be exempt from liability where loss or delay arises from circumstances beyond their control, provided that they act reasonably and in accordance with their contractual and legal obligations.
Nevertheless, carriers remain subject to the duty to:
- Exercise due diligence in ensuring seaworthiness;
- Safeguard the cargo; and
- Act in good faith in the performance of their obligations.
Insurance Considerations
Insurance plays a central role in managing financial exposure arising from disruptions to maritime trade.
Marine cargo insurance typically covers loss of or damage to goods during transit, while hull and machinery insurance protects the vessel itself.
In contrast, war risk insurance is specifically designed to cover losses arising from:
- Acts of war;
- Hostilities; or
- Related geopolitical events.
This coverage is often required where vessels transit high-risk areas such as the Strait of Hormuz.
Standard policies, however, may exclude war-related risks unless additional war risk endorsements are obtained, leaving gaps in coverage where such risks materialize.
Under UAE law and general insurance principles, the insured party bears the burden of proving that the loss falls within the scope of the policy and must comply with policy conditions, including:
- Timely notification of the incident; and
- Taking reasonable steps to mitigate further loss.
Insurers, on the other hand, retain the right to deny claims where:
- Exclusions apply; or
- The insured fails to act in accordance with the terms of the policy.
In certain circumstances, insurers may also adjust premiums to reflect heightened risk exposure in volatile regions, thereby reinforcing the importance of carefully structured insurance arrangements in international trade.
Force Majeure and Contractual Relief
The closure of a major maritime passage frequently triggers reliance on force majeure clauses, which are designed to excuse or suspend performance where extraordinary events make contractual obligations impossible or impracticable to perform.
In the context of disruptions to critical shipping routes, such as the Strait of Hormuz, affected parties may seek to rely on these provisions to justify delays or non-performance.
To successfully invoke force majeure, the affected party must typically demonstrate that:
- The event falls within the scope of the contractual definition;
- The event directly prevented or delayed performance;
- Reasonable steps were taken to mitigate the effects of the disruption; and
- Timely notice was provided to the counterparty.
Even where force majeure applies, the consequences will depend on the specific wording of the contract. Some agreements may merely suspend obligations temporarily, while others may permit termination if the disruption continues beyond a specified period.
Conclusion
The closure of the Strait of Hormuz illustrates the legal and commercial vulnerabilities that arise when global supply chains depend on critical maritime transit routes.
Suppliers, buyers, and carriers each face distinct contractual risks when shipping routes become unavailable, particularly in relation to:
- Delivery obligations;
- Timing commitments; and
- Associated logistics arrangements.
The legal consequences will be assessed on a case-by-case basis and ultimately depend on the allocation of risk within the governing contracts, including delivery terms, carriage agreements, and force majeure provisions.
Accordingly, carefully drafted contractual clauses remain essential to managing exposure to liability and ensuring that parties have clear mechanisms to address disruptions in international shipping routes.
If you require further clarification or legal assistance concerning the matters discussed in this article, please do not hesitate to contact Kh legal Advocates & Legal Consultants LLC. Our lawyers would be happy to assist you.
Authors:
