Geopolitical tensions in the Gulf have reached a new level of urgency following President Donald Trump's threat to blockade the Strait of Hormuz. With roughly 20% of the world's oil supply passing through this narrow waterway, the potential consequences for international trade are enormous. But what would a blockade actually mean for businesses with commercial contracts? Here, we explore the key legal questions. 

Khaled Moyeed

Khaled Moyeed

Could contracts be frustrated?

The doctrine of frustration is English law's safety net for situations where something so unexpected and significant happens that it would be unjust to hold parties to their original bargain.

The classic legal test set out in Davis Contractors Ltd v Fareham UDC asks whether a contractual obligation has become 'radically different' from what was originally agreed, through no fault of either party. If so, the contract is automatically discharged: future obligations fall away, though what has already happened before the frustrating event remains valid.

For a Hormuz blockade to frustrate a contract, you would need more than mere inconvenience or added cost. English courts set a high bar. The relevant questions are:

  • Is performance legally or physically impossible, or simply more difficult or expensive?
  • Was the blockade foreseeable at the time the contract was signed?
  • Are there alternative routes or means of performing the contract?
  • Has the contract already allocated the risk of such an event?

This last point is particularly significant given the current climate. Where a blockade has been publicly threatened by a sitting US president, courts may take the view that the risk was foreseeable making it harder to argue frustration for contracts entered into after those threats were made. Bear in mind that frustration is a doctrine of last resort under English law.

What about force majeure?

For most businesses, the first port of call will be any force majeure clause in their contract — not frustration. Force majeure clauses contractually excuse a party from performance (or suspend obligations) where specific events beyond their control prevent them from performing.

Whether a blockade of the Strait of Hormuz triggers a force majeure clause will depend entirely on the precise wording. Key considerations include:

  • Does the clause cover war, armed conflict, sanctions, or government action? If so, a blockade instigated by the US government may well fall within scope.
  • Does it cover acts of third parties or disruption to supply chains more broadly?
  • Is there a notification requirement? Most clauses require prompt written notice of the force majeure event.
  • Is performance prevented, or merely hindered? Many clauses only apply where performance is wholly prevented, not just made harder.

Businesses are strongly advised to review their contracts now and understand exactly what their force majeure clause covers and what it does not.

Other practical consequences

Beyond the strict legal position, a blockade would have significant practical implications. Shipping and insurance costs would likely spike sharply. Businesses should check their war risk insurance provisions and whether additional premiums are recoverable under the contract. Delivery delays could trigger late delivery penalties or claims under contracts with fixed delivery windows.

What should businesses do now?

The honest answer is: do not wait. If your business relies on goods, commodities, or energy that passes through the Strait of Hormuz, now is the time to:

  1. Review your contracts: identify force majeure clauses and understand their scope.
  2. Check your insurance: ensure war risk and cargo cover is adequate.
  3. Consider alternative supply arrangements: document any steps taken to mitigate loss.
  4. Take legal advice: the outcome in any given case will depend heavily on the specific facts and contractual wording.

 

Khaled Moyeed is partner at gunnercooke

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