What losses do the involved parties suffer as a result of Iran blocking the Strait of Hormuz?

As at the date of publication of this legal design, the Strait of Hormuz remains blocked, as do the vessels anchored in the Persian Gulf.

This results in very heavy financial costs for the shipowners of those vessels, such as:

• Medical expenses for crews during the period in which the vessels are immobilized
• Additional wages paid to crews, where applicable
• Vessels fuel costs in order to maintain electricity on board for the crew and the cargo, and above all to preserve the maneuverability of the vessel
• Expenses incurred as a result of increased war-risk insurance premiums
• Loss of income from chartering and from the general operation of the vessels
• Repatriation of crews’ costs
• Deployment of replacement crews’ costs

The legal framework allowing contracts’ ways out, in the event of a blockage

Does the contractual legal framework therefore offer the parties possible ways out, enabling them to limit their financial losses resulting from the blockage of the Strait of Hormuz, rather than paying an illegal passage tax?

 

In the case of existing contracts that are being performed, or future contracts, the contractual parties may have the possibility of adapting them or bringing them to an end. However, these possibilities are strictly regulated, in accordance with the longstanding principle of contractual certainty.

In our case, if shipowners refuse to pay the passage tax for the Strait of Hormuz, this will incidentally mean that their vessels could no longer transit through the Strait. Consequently, the performance of maritime transport contracts will be considerably disrupted, at best, and rendered impossible at worst.

Among the various legal tools available to the parties for adapting or bringing the contract to an end, you can find:

• force majeure
• contractual clauses inserted into charterparties
• recourse to the hardship mechanism

Force Majeure – definition and criteria

The concept of force majeure under French law and the corresponding concept under common law converge both in their definition and in their implementation.

The criteria that the event must be: external, unforeseeable and unavoidable, remain essential requirements for characterizing force majeure, but are nevertheless not sufficient.

The causal event relied upon must make performance of the contract legally or physically impossible, and not merely difficult or unprofitable.

The causal event, in this case the introduction of a passage tax that is illegal in two respects, both in terms of its imposition and its payment, must therefore prevent the debtor from performing its obligation.

The contract is then impossible to fulfil.

In order to anticipate the difficult situations currently faced by the maritime industry, most charterparties now contain force majeure clauses.

The invocation of force majeure is therefore anticipated in maritime law, although the clause may sometimes be more or less restrictive in its application. For vessels whose flag State law characterises this tax as terrorist financing, which is strictly prohibited by international law, European Union law and their own national law, the mere act of making the payment would constitute a criminal offence.

Consequently, it is impossible to comply with the Iranian requirements. The causal event relied upon therefore makes performance of the contract legally impossible.

Force majeure thus appears to be a relevant tool for shipowners seeking to reduce or bring an end to the losses arising from the closure of the Strait of Hormuz, by bringing the performance of the maritime contract to an end.

Force Majeure – application to the case

First situation: vessels trapped in the Strait of Hormuz at the beginning of the war, whose transport contracts had been concluded before the beginning of the war.These vessels are physically blocked in the Persian Gulf for an indefinite period.

Force majeure may be invoked by operators in the presence of unforeseeable, unavoidable and external circumstances of war that are the immediate cause of the impossibility of performing their contract.

Suspension of the contract when the carrier has no visibility as to any possible resumption of maritime operations does not appear to be a good fit.

The parties would therefore need to consider outright termination of the contract.

Unfortunately, such a solution creates major uncertainty as to the fate of the goods on board and the amount of freight payable.

 

Second situation: vessels whose voyage or time charter contract was signed before the beginning of the war and which were en route to the Strait of Hormuz. These vessels may deviate from their route in order to avoid passing through the Strait and load or unload their cargo at the next safe port.

Most charterparties provide that, where the port is inaccessible, the charterer must designate an alternative port.

The situation therefore appears neither unavoidable nor such as to prevent performance of the contract permanently. Force majeure does not appear relevant in this second situation.

Third situation: the maritime transport contract was signed after the beginning of the war.

If a contract provides for navigation through the Strait concerned, force majeure may not be invoked, because these difficulties were entirely foreseeable.

Contractual clauses – clauses inserted into charterparties

Outside cases of force majeure, charterparties may also contain a cancellation clause in the event of war. Where a charterparty provides for this risk, force majeure may not be invoked because the risk was foreseeable and had been anticipated.

This War Cancellation Clause, gives the parties the possibility of cancelling the charterparty if war breaks out between the countries mentioned.

In addition, charterparties may provide for:

• War Risks Clauses for Time Charter Parties (CONWARTIME)
• War Risks Clauses for Voyage Charter Parties (VOYWAR)

The BIMCO CONWARTIME 2025 clause and BIMCO VOYWAR 2025 clause:

• allow vessels to refuse to proceed to a dangerous area
• require the charterer to reimburse additional costs, including war-risk insurance premiums, kidnap and ransom insurance and crew bonuses
• require the charterer to indemnify the shipowners

These clauses provide additional flexibility in contractual relationships in an extremely changeable and uncertain environment.

Hardship mechanism – definition and limits

The hardship mechanism has recently been incorporated into legislation governing private-law contracts under both French and Belgian law. However, it has still not been incorporated into Luxembourg law.

Care must therefore be taken regarding the law governing the contract.

Under French law, Article 1195 of the Civil Code defines the hardship mechanism as follows:

“If a change in circumstances that was unforeseeable at the time the contract was concluded renders performance excessively onerous for a party that had not agreed to assume the risk, that party may request renegotiation of the contract from the other contracting party. In the event of refusal or failure of renegotiation, the parties may agree to terminate the contract or ask the court to adapt it.”

In practice, the hardship mechanism requires performance of the contract to continue throughout the process of renegotiating its terms. Thus, hardship offers only a future and remote solution. This solution may therefore not be entirely suited to maritime transport contracts requiring immediate revision.

 

➡️For any questions regarding environmental, energy or transportation law, please contact Fanny Berrezai.