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—supplier, buyer, or carrier—and the governing law of the contract.
The Role of 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. They must instead 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.
- In FOB (Free on Board) contracts, risk transfers to the buyer once goods are loaded onto the vessel at the port of origin.
- In CIF (Cost, Insurance, and Freight) contracts, risk also transfers at shipment, although the seller arranges transport and insurance to the destination.
The choice of Incoterm is therefore critical in determining each party’s obligations and exposure to risk.
Impact on Sellers
In CIF contracts, sellers are responsible for producing goods and arranging shipment in accordance with contractual timelines and specifications.
Where a critical shipping route becomes unavailable, sellers may face:
- Claims for delay
- Breach of contract
- Failure to deliver
In such cases, sellers may rely on legal doctrines under UAE law:
- Article 273 (Force Majeure): If performance becomes impossible, obligations are extinguished and the contract may be rescinded.
- Article 246 (Good Faith): Parties must act honestly, mitigate losses, and cooperate.
- Article 249 (Exceptional Circumstances): Courts may reduce obligations where performance becomes excessively burdensome.
The availability of these defenses depends on contractual wording and the nature of the disruption.
Impact on Buyers
Buyers face significant exposure, particularly under FOB contracts where they control shipping arrangements.
Key risks include:
- Liability for delayed delivery
- Breach of downstream contracts
- Supply chain disruption
Buyers may also incur:
- Loss of profits
- Business interruption
- Damage to commercial relationships
Unlike sellers, buyers often face indirect liabilities across multiple contractual layers. Their exposure depends largely on risk allocation and downstream contractual commitments.
Impact on Carriers
Carriers operating under charterparties or bills of lading face complex obligations when shipping routes are disrupted.
They must determine:
- Whether alternative routes are commercially reasonable
- Whether deviation is permitted under contract
Carriers may rely on:
- War risk clauses
- Deviation clauses
- Force majeure provisions
Under UAE Maritime Law (Federal Decree-Law No. 43 of 2023), carriers may be exempt from liability where delays arise from circumstances beyond their control, provided they act reasonably and exercise due diligence.
However, they remain obligated to:
- Ensure seaworthiness
- Safeguard cargo
- Act in good faith
Insurance Considerations
Insurance plays a critical role in mitigating financial exposure.
Key types include:
- Marine cargo insurance – covers physical loss or damage
- Hull and machinery insurance – protects vessels
- War risk insurance – covers geopolitical and conflict-related risks
Standard policies often exclude war-related risks unless specific endorsements are obtained.
Under UAE law:
- The insured must prove the claim falls within policy coverage
- Timely notification is required
- Reasonable mitigation steps must be taken
Insurers may deny claims where exclusions apply or conditions are not met.
Force Majeure and Contractual Relief
The closure of a major maritime route often triggers force majeure clauses.
To rely on force majeure, a party must demonstrate:
- The event falls within the contractual definition
- It directly prevented or delayed performance
- Reasonable mitigation efforts were made
- Proper notice was given
Contractual consequences vary:
- Temporary suspension of obligations
- Extension of time
- Termination if disruption persists
Each outcome depends on the specific contractual wording.
Conclusion
The closure of the Strait of Hormuz highlights the vulnerabilities inherent in global supply chains dependent on critical maritime routes.
Suppliers, buyers, and carriers each face distinct legal risks relating to:
- Delivery obligations
- Timing commitments
- Logistics arrangements
The legal outcome in each case depends on contractual risk allocation, governing law, and the applicability of force majeure and hardship provisions.
Carefully drafted contracts remain the most effective tool for managing such risks and ensuring clarity in times of disruption.
For further legal assistance, Kh Legal Advocates & Legal Consultants LLC is available to provide strategic advice and support.
Frequently Asked Questions (FAQ)
1. Does international law (UNCLOS) guarantee the Strait will remain open?
UNCLOS provides a right of transit passage. However, enforcement may be limited during geopolitical conflict. Parties should rely on contractual protections rather than assuming uninterrupted access.
2. Under a CIF contract, who bears the risk if the Strait is closed?
Under Incoterms® 2020, risk transfers to the buyer once goods are loaded onto the vessel. The buyer typically bears the risk during transit and must rely on insurance coverage.
3. What is the difference between force majeure and hardship under UAE law?
- Force Majeure (Article 273): Applies when performance becomes impossible, potentially leading to contract termination.
- Hardship (Article 249): Applies when performance becomes excessively burdensome, allowing courts to adjust obligations.
4. Can a carrier be liable for delaying shipment to avoid the Strait?
Carriers may avoid liability if delay is due to external causes and permitted under contractual clauses. However, liability may arise in cases of negligence or bad faith.
5. Does standard marine insurance cover closure of the Strait?
Typically no. Standard policies exclude war risks unless specific endorsements are obtained.
6. What is the duty to mitigate?
Under Article 246, parties must take reasonable steps to reduce losses, such as seeking alternative routes and notifying counterparties promptly. Failure to do so may reduce compensation claims.
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.
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