Due to the escalation of the conflict between the United States, Israel, and Iran, the Strait of Hormuz has been closed, air traffic has been suspended, several civilian vessels have been attacked, and banks have experienced disruptions in their digital services. For businesses, this entails a risk of breaching contractual obligations and supply chain disruptions. It is important to note that military actions do not automatically trigger force majeure clauses, and exemption from liability largely depends on the specific terms of the contract. Costs are further exacerbated by insurers cancelling policies and increasing premiums. This article examines whether these risks can be mitigated and what steps should be taken in such circumstances.
On February 28, the United States and Israel commenced a military operation against Iran. In response, Iran effectively closed the Strait of Hormuz and launched attacks against military bases and oil refineries belonging to these nations in neighboring states. This has had a significant impact on the global economy, trade, and energy markets, given that the Strait of Hormuz is a conduit for one-third of the world’s liquefied natural gas, nearly a quarter of globally consumed oil, and numerous other goods. The primary risks businesses may face in this situation, and potential mitigation strategies, are outlined below.
RISK NO. 1: BREACH OF CONTRACTUAL OBLIGATIONS AND FORCE MAJEURE
While the Strait of Hormuz was formally closed for only one day, February 28, navigation through it has effectively come to a complete standstill, with approximately 200 vessels at anchor. Furthermore, problems have arisen with air travel. “That can lead to force majeure claims, breach of contract disputes, and arguments over who bears the risk of delay, non-performance, or added cost,” says Pranav Srivastava, a partner at Phoenix Legal.
In such cases, a force majeure clause, which exempts parties from liability for non-performance due to insurmountable circumstances and uncontrollable events, plays a critical role. Such events typically include natural disasters, epidemics, fires, and strikes. However, military actions are not always automatically deemed force majeure.
Therefore, the first question is whether the clause specifically refers to events such as war, hostilities, strikes, or similar disruptions, points out Srivastava. If it does, the affected party may be able to suspend performance or, in some cases, terminate the contract, but usually only after providing prompt notice and taking mitigation steps. If those events are not listed specifically, broader wording such as “events beyond reasonable control” may still be helpful, but that will depend on the clause, the lawyer says.
Given this, lawyers recommend incorporating a bespoke force majeure clause into contracts that would detail the consequences of external circumstances hindering performance. Furthermore, Ilya Maslov, Head of Corporate Practice at UCL | د. خالد, adds that provisions on exemption from liability, conditions for suspension or deferment of performance, and rules of party conduct during military conflict, sanctions, blockade, and political risks are of particular importance in the agreement.
If there is no express force majeure clause, the fallback position is much narrower. Srivastava explains: “Under English law, and similarly in other jurisdictions that follow common law principles such as Indian law, the doctrine of frustration applies only where performance has become truly impossible or illegal, not simply more difficult or more expensive.”
In general, the objective impossibility of performance is the primary criterion for invoking force majeure. For example, in the UAE, parties were not released from obligations during the 2008 financial crisis. A similar approach was established in arbitration practice following the major disruption to shipping during the 2021 Suez Canal blockage. However, the UAE Civil Code allows a court to reduce the obligatory performance if its fulfillment becomes excessively onerous.
Simultaneously, the ability to invoke force majeure will also depend on the applicable law. In the UAE context, three principal regimes would most likely be considered: UAE federal law, DIFC law, and ADGM law, enumerates Daria Selivanova, counsel at Habib Al Mulla & Partners. According to her, the approaches are as follows:
- Under UAE federal law, force majeure may apply where an extraordinary event renders the performance of a contract impossible. Courts assess whether the event directly caused the non-performance and whether reasonable mitigation steps were available.
- Under DIFC law, non-performance may be excused where an unforeseeable impediment beyond the party’s control prevents performance.
- Under ADGM law, force majeure operates primarily as a contractual mechanism. Where no clause exists, the doctrine of frustration may apply if the event fundamentally alters the nature of the contractual obligation.
UAE courts have recognized that military actions may qualify as force majeure circumstances. However, this requires documented evidence of the impediments, which must have been unforeseeable and unavoidable. Therefore, lawyers recommend documenting all factual circumstances preventing the performance of contractual obligations due to the current situation. Ultimately, to invoke force majeure, the following must be demonstrated:
- the event was beyond the party’s control;
- it was insurmountable;
- it was unforeseeable;
- it renders the performance of the obligations objectively impossible.
Foreseeability is another issue now. Because the conflict is already underway, parties entering into new contracts may be treated as having contracted against a known risk, notes Srivastava.
Timely notification to the counterparty regarding the impossibility of performance is also crucial, notes Imamutdinova. This is often considered in dispute resolution practice, and delayed notification may lead to the loss of contractual protection, even if the event itself objectively justified exemption. For instance, Bahrain’s energy company, Bapco Energies, has publicly declared force majeure affecting the entire group’s operations, citing the regional conflict in the Middle East and a recent drone strike on an oil refinery. Qatar’s QatarEnergy has also issued relevant notices to its counterparties.
Besides timely notification, courts assess whether there were reasonable alternatives to perform the obligations, other available routes, and how the contract allocates risks of delays and additional expenses. Accordingly, Imamutdinova advises businesses to evaluate options for reasonable modifications to supply logistics and seek alternatives that might still allow for the fulfillment of contractual duties.
RISK NO. 2: VIOLATIONS OF INNOCENT PASSAGE AND REASSESSMENT OF INSURANCE TERMS
On March 11, three civilian vessels in the Strait of Hormuz came under attack: the Thai bulk carrier Mayuree Naree, the Marshall Islands-flagged bulk carrier Star Gwyneth, and the Japan-flagged container ship One Majesty. All vessels sustained damage. Subsequently, the Islamic Revolutionary Guard Corps (IRGC) stated that passage through the Strait of Hormuz is only possible with Iran’s permission and that any vessels “associated with the aggressors” have no right of passage.
Given the current conditions, a review of charters is paramount to ensure they contain provisions on war risks (e.g., BIMCO CONWARTIME/VOYWAR), advise interviewed experts. Typically, contracts include a safe port clause, granting the shipowner the right to decline presenting its vessel for loading or to avoid an unsafe region entirely. It is also necessary to regularly update route risk assessments, consider warnings from international maritime security services, and incorporate additional protective mechanisms (such as sanctions clauses and war cancellation clauses) into new contracts. Furthermore, Maslov recommends focusing on business interruption insurance, which may arise from logistical disruptions.
Furthermore, the ongoing conflict has entailed insurance risks. These manifested on the very first day of the conflict, with reports of insurers cancelling policies and withdrawing war risk coverage for vessels transiting the Persian Gulf and Strait of Hormuz. According to Srivastava, that leaves shippers and energy companies exposed unless they can obtain replacement cover, which is usually available only at a much higher cost. Concurrently, U.S. President Donald Trump mandated that the U.S. International Development Finance Corporation provide reasonably priced political risk insurance and issue guarantees for the financial security of all maritime transport through the Persian Gulf.
Consequently, it is imperative to verify insurance coverage and clarify terms concerning political and war risks. “The practical point is that businesses should not assume either that they are covered or that they are excluded. They need to review policy wording closely, notify claims early to preserve rights, and explore specialized war-risk or political-risk cover where that is still available,” says Srivastava.
Another issue is that, as a rule, insurers are not liable for losses arising from military actions, notes Konstantin Krasnokutsky, President of the Russian Maritime Law Association (RUMLA). The region of military operations is typically determined based on publications by the Joint War Committee (JWC). If a region falls under the JWC Listed Areas, standard insurance policies do not provide coverage there, the lawyer explains.
The reassessment of insurance terms by companies has already led to premium increases, which during the escalation have reached 1-3% of the vessel’s value (approximately $7.5 million for a ship valued between $200 million and $300 million). In peacetime, this figure is 0.2-0.3%. This does not constitute a breach by the insurer, as they are entitled to make such adjustments, states Krasnokutsky.
This is the primary risk for shipowners. Otherwise, carriers are well-protected under maritime law, which traditionally safeguards the interests of shipowners, the lawyers say. For example, under the Hague-Visby Rules, the carrier is not liable for loss or damage arising from or resulting from acts of war, perils, dangers, and accidents of the sea, acts of God, delays in delivery of goods, arrests, etc. However, this also means that in the short term, losses will fall largely on cargo owners and charterers.
Additionally, Krasnokutsky highlights a risk specific to the Strait of Hormuz: the political targeting of vessels. Neither Iran nor the US has ratified the UN Convention on the Law of the Sea (UNCLOS), and Iran acts according to its national legislation, considering the strait its territorial waters. Consequently, businesses must assess not only the military threat but also the vessel’s flag and the nationality of its beneficial owners. “Vessels under the US flag or those of countries supporting Israel and the US are likely in a higher-risk zone,” Krasnokutsky warns.
The impact is not limited to marine insurance, warns Srivastava. Property and business interruption policies may limit payouts for damage caused by missile strikes or military action. Trade credit insurers are also reviewing Gulf exposure and may reduce limits for businesses dealing with Middle East counterparties.
RISK NO. 3: ISSUES WITH PAYMENTS, ADMINISTRATIVE PROCEDURES, AND COMPLIANCE
While most companies retain the capacity to continue operations, periods of geopolitical tension expose them to infrastructural risks. For instance, following strikes on an Amazon Web Services data center, major UAE banks experienced digital service disruptions, and clients faced payment delays. Although the banking system continues to function overall, companies are increasingly considering opening additional accounts with other UAE banks or in alternative jurisdictions, notes Imamutdinova. “This approach reduces dependence on a single financial channel and ensures continuity of settlements,” she explains.
Furthermore, in the initial days of the conflict, some government and administrative authority employees transitioned to remote work. According to Imamutdinova, this affects the processing times for corporate applications, company registration amendments, and the issuance of official documents. Temporary difficulties have also arisen with the legalization of documents through the UAE Ministry of Foreign Affairs.
There is also a risk of the introduction of new Iran-related sanctions or export controls, adds Danila Kruchkov, an associate at Habib Al Mulla & Partners. This may result in enhanced compliance screening by local and correspondent banks.
RISK NO. 4: VIOLATIONS OF LABOR LAW
Companies located in the Middle East that may be affected by the current conflict must ensure the safety of their employees. This obligation applies at all times; therefore, Hossam Elsafoury, Senior Associate at Habib Al Mulla, recommends that local employers undertake the following measures:
- assess conditions under which employees may be exposed to danger;
- implement appropriate occupational health and safety protocols;
- inform employees about internal security procedures and emergency action protocols;
- review travel and on-site work policies;
- arrange for remote work where feasible.
If an employee sustains an injury in the course of their employment, the employer is liable for medical care and must pay compensation. This is stipulated in Article (37) of Federal Decree-Law No. (33) of 2021, as amended, regulating labor relations (“UAE Labor Law”).
RISK NO. 5: NEW INVESTMENT DISPUTES
War does not automatically release host states from their obligations under bilateral investment treaties. Investment treaties can potentially continue to operate even during conflict, with states still potentially liable to compensate foreign investors for losses, says Srivastava. According to him, at a practical level, investment activity is already being affected: deals and fundraisings are being put on hold, including reported pauses in talks involving Gulf energy and infrastructure assets.
