Iran revisited: the Strait of Hormuz and the contracts it breaks

Closure of the Strait has sent vessels around the Cape of Good Hope, and the resulting disputes are running straight through charterparties, war-risk clauses and sanctions compliance.

What happened

• The closure of the Strait of Hormuz has forced vessels to reroute around the Cape of Good Hope, adding 10 to 14 days and roughly $1 million in fuel per ship.
• That is a live issue for shipping and maritime contracts, and disputes are already emerging between charterers and shipowners.
• Charterers want their cargo moved and may order a vessel into the Gulf to do it. Owners do not want their ships sailing into a war zone.
• Most charterparties contain a CONWARTIME clause giving the owner the right to refuse an area it considers reasonably dangerous because of war. The legal question is whether the current situation clears that threshold.
• Who pays for the rerouting is the other immediate question lawyers are being asked.
• Then there is off-hire. Under a time charter the charterer pays a daily hire rate; if the vessel cannot perform because it is stuck or waiting for safe passage, the argument is whether it goes off-hire and the charterer stops paying.

Why it matters

• A central question across sectors is whether the conflict qualifies as a force majeure event. It will be invoked well beyond shipping — in insurance, and by construction firms whose projects now take longer.
• Sanctions compliance is generating its own workload. The conflict has opened a divergence between the US, UK and EU regimes: the US has issued a 30-day general licence authorising the sale of Iranian-origin crude already loaded onto vessels, while the UK and EU have issued no corresponding relief. Businesses operating across all three now have to reconcile them.
• Cyber warfare is the third front. Iran has threatened 18 technology companies, including Apple, Google and Microsoft, which raises contractual liability questions where an organisation cannot perform because it has been attacked.

How to use this in applications and interviews

• This is a gift for shipping, energy, insurance and international arbitration applications, because it lets you move from a headline to a clause in two sentences.
• Name the mechanism, not just the event. "A CONWARTIME clause lets the owner refuse a reasonably dangerous area; the dispute is over whether this situation meets that threshold" tells an interviewer you understand how the risk is actually allocated.
• Show you know who is on which side. Charterers want the cargo moved, owners want the crew and hull safe, and insurers sit behind both. Advice looks different depending on which one is your client.
• The off-hire question is the money question: a daily hire rate on a large vessel makes each day of delay a substantial sum, which is what turns a geopolitical event into litigation.
• Use the sanctions divergence to show cross-border thinking. A single group can be authorised to complete a sale under US law and exposed under UK or EU law on the same cargo.
• If you are applying to a firm with a disputes practice, connect it: force majeure and frustration arguments arising now will be tried in two years' time.

Key terms

• Charterparty is the contract hiring a vessel; a time charter hires it for a period, a voyage charter for a specific journey.
• CONWARTIME is a standard-form war risks clause allowing an owner to refuse to send a vessel into an area it reasonably judges dangerous because of war.
• Off-hire is the period during which a time charterer stops paying because the vessel cannot perform the service it was hired for.
• Force majeure is a contractual clause excusing performance on defined events outside a party's control; in English law it exists only if the contract creates it.