The Strait of Hormuz crisis has exposed how fragile contractual protections are amid supply disruption. Experts tell Sheryl Ubana why it is time to rewrite the force majeure clauses that anchor global trade
Tensions in the Strait of Hormuz through which about 20% of the world’s oil and liquefied natural gas (LNG) passes, have sent shockwaves across global energy and commodity markets.
As hostilities escalated, fuel prices surged, shipments stalled and risk premiums climbed. Following the recent ceasefire, oil prices fell sharply by almost 15%. Yet stability of trade and supply is far from restored.
The impact on Asia from the conflict and closure of the strait is enormous. The US Energy Information Administration reported in 2024 that 84% of the crude oil and condensate, and 83% of the liquefied natural gas that moved through the Strait of Hormuz was destined for Asian markets. China, India, Japan and South Korea were the top destinations for crude oil being moved to Asia.
The Australian Institute of International Affairs states that Japan is even more exposed, with about 95% of its crude oil coming from the Middle East. The crisis poses a threat to more than just energy. A full-spectrum supply chain including fertiliser, critical to food security across South and Southeast Asia, is at risk, with the steady movement of manufactured goods, electronics and consumer products also having to pass through Gulf ports.
Even if the strait fully reopens, supply disruptions and logistical bottlenecks are likely to persist for months. The speed of recovery will depend on how long supplies are disrupted, and how stable any peace agreement proves to be, according to the . A prolonged closure, combined with a fragile truce and improved alternative supply chains, may also leave companies hesitant to quickly return to the route.
Amid ongoing uncertainty, buyers and suppliers face a pressing question: At what point does disruption justify non-performance? The answer, legal experts say, depends less on the scale of the crisis and more on the precise wording of contracts, in particular how force majeure clauses are defined and applied.
Experts say there are practical steps businesses can take to regain control. Rather than waiting for the next escalation, they point to the immediate need to consult legal teams to re-examine the language anchoring existing agreements, strengthen risk allocation and update force majeure provisions.
The anchor
“The first point that bears noting is that force majeure is a ‘creature of contract’ – not a standalone legal principle,” says Max Rockall, partner and head of LNG and energy disputes APAC at Squire Patton Boggs in Singapore.
Kenny Yap, partner and co-head of international trade and maritime practice at Allen & Gledhill in Singapore, says: “How parties would frame and substantiate force majeure claims would depend on a number of factors including the precise wording of the force majeure clause, the applicable law, the factual circumstances giving rise to the alleged force majeure event, and the effect such event has on the contractual obligations of the parties.
“Whether such an assertion would succeed at the end of the day would depend on the facts and circumstances of the case.”
Peter Craney, marine insurance partner at Kennedys Law in Sydney, says that force majeure clauses “will often require the party affected by the force majeure event to notify the other party of the event comprising force majeure as soon as reasonably practicable”.
In recent weeks, Rockall says the market has heard of two different categories of force majeure declarations:
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- Those originating from QatarEnergy, as seller, arising out of missile attacks that caused damage to the Ras Laffan facility; and
- Those emerging from portfolio LNG sellers with offtake capacity at LNG terminals in the Middle East.
“Whether or not these are valid force majeure claims will depend on whether the party claiming relief has followed the force majeure provisions of the contract accurately,” says Rockall.
Kirindeep Singh, senior partner at Dentons Rodyk & Davidson in Singapore, says: “Another possible angle is classifying these developments as ‘government actions’, possibly even as actions by foreign governments, e.g. Iran by way of naval controls.”
When tides won’t turn
Despite the surge in force majeure declarations across energy and shipping contracts, legal experts warn that success is far from assured. “Force majeure claims have, speaking from a very general perspective, been quite hard to substantiate,” says Andrew Lee, marine and energy disputes partner, and head of Singapore office at Hill Dickinson.
“Often, the fact that the vessels cannot transit safely into and out of the Gulf does not give rise to force majeure.”
Dentons Rodyk’s Singh says that “courts across the APAC jurisdictions may take slightly different interpretations to force majeure clauses, but strict interpretation of the construction of the clause remains the dominant approach.
“Force majeure clauses are interpreted narrowly, and courts or arbitral tribunals would require the event to fall within the wording of the clause. Impossibility, or near impossibility, is still the main focus. Hardship or increased costs, unless such increase is astronomical, usually do not suffice.”
Craney observes: “The fact that performance of a contract has become merely difficult or expensive to perform – for example, by a carrier having to take a longer, alternative route – is seldom sufficient to relieve a party on the grounds of force majeure.
“It is for the party relying on a force majeure clause to satisfy a court or other tribunal that this is the effect of the clause.”
Singh says that there is also the issue of “whether the requisite notice within the time period specified in the force majeure or notice clauses has been complied with. Some courts take a strict view of compliance with notice provisions, especially if the requisite notice is specified as a condition precedent.”
Anna Diaz-Sanchez, associate in the international dispute resolution practice group at Squire Patton Boggs in Singapore, lists these common pitfalls when it comes to force majeure:
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- Failing to establish a causal link between the act, event or circumstance in question and the impact on performance;
- Being unable to satisfy the linguistic threshold of prevent, hinder, impede or delay, etc., in respect of contractual performance;
- Not complying with the contractual notice requirements; and
- Not properly fulfilling the duty to mitigate.
From an in-house counsel perspective, Satoshi Shinkuma, president of the Japan In-house Lawyers Association in Tokyo, says: “The issue is whether force majeure clauses can be invoked, as companies are unable to fulfill their supply obligations. Since most force majeure clauses explicitly exclude war as a covered event, in-house counsel are likely struggling with how to respond.”
He adds that, “under Japanese civil law, exemption from liability due to force majeure is recognised, but the scope of its application is unclear. In-house counsel are likely engaged in discussions regarding how to negotiate with their customers.”
Wave of disputes
Beyond the immediate questions of whether force majeure applies, experts are already warning of a significant wave of downstream disputes emerging from disrupted trade flows.
“There will be huge trading losses both in respect of unfulfilled physical trades and paper trades taken out as hedges against physical trades that, in many cases, will not have taken place,” says Hill Dickinson’s Lee. “Trades will commonly involve chains of parties, and often the contracts will not be entirely back-to-back, either in their wording or with regard to timings.
“There is therefore huge scope for disputes where some parties have greater claims to force majeure than others, even in respect of the same trade.”
For Dentons Rodyk’s Singh, one area of dispute can be classified as causation versus economics: “Was performance prevented, or just more expensive?” Another area of dispute is the question of reasonable alternatives. “For example, when it comes to shipping, delivery of goods and supply chain issues, the question that often arises is, could cargo have been rerouted? Could supply have been sourced elsewhere?”
Squire Patton’s Rockall says there are a few disputes arising out of the declarations of force majeure, including:
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- Contractual opportunism. Some sellers may seek to rely on the force majeure provisions of their contract as a means of avoiding performance, even if they are not entitled to do so;
- Force majeure notice. Whether or not a party that has received a force majeure notice from its supplier is able to pass it through to its downstream customers;
- Extent of the duty to mitigate. Whether a seller claiming force majeure is contractually obliged to procure replacement supply; and
- Make-up provisions. Disruptions to LNG deliveries may trigger disputes over buyers’ rights to take delivery of previously undelivered volumes at a later date, including disagreements on entitlement and the timing and scheduling of those deferred cargoes.
Drifting towards frustration
While force majeure remains central, experts identify the doctrine of frustration as the key alternative mechanism. “Where no force majeure clause exists, parties may consider the common law doctrine of frustration, but courts apply it restrictively,” says Edward Liu, international arbitration, shipping and commodities partner at Haiwen & Partners in Hong Kong.
Kennedys’ Craney says: “Frustration of adventure will be tested where war renders performance radically different, beyond specific force majeure events,” although he notes that it is “very difficult to demonstrate that a contract has been frustrated.
“Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, or the obligations under the contract are so radically different from those which the parties intended that it would be unfair to hold the parties to their obligations.”
Singh also mentions frustration as another legal doctrine to be tested in the absence of a force majeure clause. “This may not be ideal, as the whole contract falls away, as opposed to the contractual obligations being suspended for a certain period of time,” he says.
Securing the lifelines
The lessons from the covid-19 and the Ukraine war disruptions are now reshaping contract drafting priorities.
“Our advice to in-house counsel is to act early and systematically: issue timely FM [force majeure] notices, preserve evidence of disruption, assess mitigation options, and align your position with operations and insurance teams,” says Anna Kim, member of the Chartered Institute of Arbitrators, and special counsel at GPS Legal in Hong Kong.
Kristian Bradshaw, cross-border energy and infrastructure partner at Mori Hamada & Matsumoto in Tokyo, says: “Don’t bury your head in the sand. Now is the time to start assessing your supply chain risks, not in six months’ time.”
Bradshaw says that parties need to review supply contracts to “assess how the supplier could claim to be relieved from its delivery obligations, whether through force majeure or other provisions”.
For Haiwen’s Liu, “well-documented decision making, co-ordinated with insurers and aligned with governing law considerations, will best position companies to navigate both the present uncertainty and future disputes effectively”.
Hill Dickinson’s Lee advises clients to “future-proof the contracts they negotiate going forward and to try to stay back-to-back where possible”.
Looking ahead, Singh says that the biggest shift has to happen. “Businesses should expand force majeure definitions and explicitly include war/regional conflict, closure of key shipping chokepoints … and even cyber disruptions as force majeure 别惫别苍迟蝉.”
Allen & Gledhill’s Yap says prompt legal consultation is essential for companies caught in or anticipating fallout from the Strait of Hormuz conflict. “The solution that legal counsel can offer would depend on the facts and circumstances of each case … clients should not rule out the risk of a long-term disruption, especially when entering into future contracts with their counterparties.
“Businesses should consult their legal advisers as soon as possible if they wish to future-proof their contracts against similar geopolitical shocks.”
Rockall notes: “In some instances, force majeure clauses may not be fit for purpose to address the complex issues at hand … Unfortunately, by the time parties come to realise this, it may be too late.”
After a succession of shocks, from the pandemic to the Ukraine war and now the turmoil in the Middle East, experts say it is time for businesses to re?examine the language anchoring their agreements. “The question comes whether we will now see a renewed focus on these clauses,” says Rockall.
