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Heightened tensions with Iran – what shipowners, charterers and their insurers need to know
January 7 2020
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).
Kevin Cooper is a partner at MFB Solicitors in London who specialises in shipping and welcomes any questions in relation to this article.
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