The killing of Major General Qasem Soleimani by a US drone on
Friday 3 January has led to significantly increased tensions in the
Persian Gulf and Strait of Hormuz, an area that has been
comparatively quiet for the past few months. This Q&A, updated
from an article first published in July 2019, provides a compact
briefing on the important contractual issues. Being short, it can
be no more than a general guide: business decisions taken as a
result of the evolving situation in the region must be based on the
exact terms of any applicable contract, the current state of
knowledge of events and the political and military situation.
What has happened?
The US Joint Special Operations Command (JSOC) has killed Major
General Qasem Soleimani, a leading Iranian political figure and the
head of the Islamic Revolutionary Guard Corps' Quds Force. A
JSOC-operated drone destroyed a convoy carrying Soleimani and
several Iranian-backed militia leaders as they departed Baghdad
International Airport early on the morning of Friday 3 January,
killing the General and five others.
In a statement on Friday 3 January, Iran's Ayatollah Khamenei
threatened "forceful revenge" but some experts suggest
that Iran is likely to take a more moderate course than its
rhetoric suggests - at most hitting soft targets. That could
extend, once again, to merchant shipping as was previously seen,
for example, in attacks on four tankers in Fujairah, the Front
Altair and the Kokuka Courageous while transiting the Strait of
Hormuz and the detention of the Stena Impero, all during
2019.
What is the Strait of Hormuz?
It connects the Gulf of Oman with the Persian Gulf, is about 21
nautical miles wide at its narrowest point and up to about a third
of the world's oil is estimated to pass through it.
What happens if Iran "closes" the Strait of Hormuz?
This has previously been threatened by the Iranian government but,
if it were to happen, it's unlikely that it could do so in a
way that would alter the effects on contracts that are described
below. The Strait is an International Strait under the United
Nations Convention on the Law of the Sea 1982, which gives vessels
a right of innocent passage through it and, although not all
countries are parties to that Convention, as a matter of public
international law, its regime probably applies. Anyway, half the
Strait is Oman's territorial waters. So, whatever Iranian law
permits Iran to do, any "closure" of the Strait will
probably be a practical, rather than a legal, one: mine laying
and/or patrolling warships and aircraft, or a "hot war"
that may effectively make the Strait impassable.
Does it matter whether war is declared?
No. It probably won't be, as the United Nations Charter
prohibits that. It is more likely that any military action would be
an act of "self defence" or, possibly, acting under a
mandate from the United Nations Security Council. In any event,
under English law, the term "war" is given a
non-technical meaning: if a businessperson would describe something
as being a "war", the law will also consider it to be. In
any event, most War Risks clauses do not require a state of war and
will be applicable in similar circumstances where there is a
physical threat to a vessel (such as piracy).
What are the relevant contractual terms?
Most charterparties nowadays contain War Risks Clauses, either in
their standard form or through the addition of rider clauses. The
exact terms differ, but BIMCO's CONWARTIME (for time
charterparties) and VOYWAR (for voyage charterparties), both most
recently revised in 2013, are some of the most up-to-date, and have
been developed over time to respond to relevant English court
decisions.
Do War Risks clauses govern the situation around the Strait of
Hormuz?
Probably. It will depend on the exact terms of the charterparty,
but, using the definitions in the BIMCO clauses mentioned above,
even though we can't be sure who attacked, how they attacked or
why, any realistic explanation would probably fall within the
definition.
What is the effect of the War Risks clause applying?
Again, it will depend on the terms of the charterparty but, under
certain of the BIMCO clauses, the master/shipowners can refuse to
go to the relevant area if, in their reasonable judgment, it may be
dangerous or may become dangerous for the vessel to proceed there.
It is likely that this judgment should be made in good faith and
the likelihood of exposure to harm does not need to be "more
likely than not", but it does need to be more than "a
bare possibility". There are also provisions for shipowners to
serve notice on charterers for alternative orders and provisions
(in the case of time charterparties) about who pays Additional
Premiums as a result of entering a War Risks area. There are
circumstances in which the owners can cancel a voyage
charterparty.
Does it matter whether the risk has increased since the vessel was
fixed?
Probably not under a period charter (at least not under the recent
BIMCO War Risks clauses). However, the position may be different
for trip time charters or voyage charters where there is an express
agreement to proceed to a port within the Persian Gulf.
What if the vessel is damaged when proceeding through the
Strait?
This will depend on the terms of the relevant charterparty.
Opinions differ as to whether the shipowners may be able to bring a
claim under time charterers' usual safe port warranty but the
charterer may be in breach of an express obligation contained in
the relevant War Risks clause or they may impliedly indemnify the
shipowner for the consequence of following their orders. Acceptance
by the shipowner of charterers' orders will likely not affect
that position (though there are exceptions).
Might the charterparty be frustrated?
Yes, though the answer to this question very much depends on the
terms of the charterparty (including its duration) and how the
political and military situation evolves. English courts are often
reluctant to find that a contract is frustrated.
What should shipowners and charterers do?
For existing fixtures, they should follow events and check
contractual terms. For new fixtures, they should check that they
include up-to-date War Risks clauses. Owners entering into voyage
charterparties need to take Additional Premiums (which can be very
significant and are not recoverable from charterers) into account
when negotiating freight. Of course owners also need to consider
additional physical security measures that may be required as a
result of entering the area and they should also have an eye to any
loan documentation in respect of their vessels, so as to avoid any
potential events of default with their financiers.
What about intermediate charterers?
As usual, they should try to ensure that War Risks obligations are
back-to-back, both up and down the chain. Where they charter a
vessel and voyage charter her out, they should ensure that the
respective War Risks clauses are as closely aligned as possible
(for example by using the two BIMCO clauses).
Originally published January 07, 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.