USA/Israel and Iran Conflict: Effect on trade contracts

By Damon Thompson, Luke Zadkovich, Edward Cole, Joseph F. Carilli, Jr., Jiahang Zhou
4 March 2026

Aside from the physical risk of loss of life, destruction and damage to property, the outbreak of war – likely now the appropriate word for the conflict – [FN – https://bit.ly/3Nehk64] in the Middle East has a significant disruptive effect on contracts in the shipping industry.

Indeed, since the beginning of the conflict, the U.K. Maritime Trade Operations Centre has reported several incidents involving commercial shipping in the Persian Gulf, the Gulf of Oman, and the Strait of Hormuz.[1] In addition, although its authority to take such an action is presumably extra-legal, Iran has purportedly closed the Strait of Hormuz to commercial traffic. As a result, at the time of writing, major companies are rerouting voyages away from the region.[2]

The effect on each contract depends on the contractual allocation in the particular wording, and there are no blanket rules setting out a particular consequence. Each contract needs to be reviewed for its language and the factual picture (which continues to change). Noting that, we summarise some of the overall developments.

Insurance

In the UK market, war risk policies typically have a Notice of Cancellation and Automatic Termination Clause, which allows insurers to cancel policies when faced with a significantly increased war risk. Typically, cover for other geographical areas removed from the war risk is automatically reinstated on cancellation of the policy, with an exclusion of the war risk area.

To date, Insurers have been and are likely to continue to pull cover for War Risks arising from this conflict. At the time of writing, Gard, Skuld, NorthStandard, the London P&I Club and the American Club, announced cancellations with effect from 5 March for fixed products (e.g. charterers’ liability). Mutual covers (like mutual owners’ entry) may remain in full force.

The area of exclusion in the Iran and Persian/Arabian Gulf area in reinstatements appears to be broad, including Persian/Arabian Gulf and adjacent waters including the Gulf of Oman and waters west of the line from Oman’s territorial limit off Cape al-Ḥadd at 22°42.5’N, 59°54.5’E northeast to the Iran-Pakistan border at 25°10.5’N, 61°37.5’E.

Similarly, under U.S. law, commercial insurers may withdraw from the war risk market when faced with the large potential exposures that war presents to shipping.[3] However, there are times when the U.S. federal government provides reinsurance in the wake of crisis. For example, in recognition of potential commercial withdrawal from the market following 9/11, the U.S. Congress passed the Terrorism Risk Insurance Act of 2002, which provides a federal reinsurance backstop for certain property and casualty losses resulting from the terrorist attacks.[4]

In addition, on 3 March, the U.S. President announced that the U.S. International Development Finance Corporation would provide political risk insurance and guarantees for vessels. The U.S. President also announced that the U.S. Navy may provide armed escort through the Strait of Hormuz. While the U.S. government, at present, has not provided any additional details on the process, the U.S. International Development Finance Corporation announced that it “will offer support to commercial shipping charterers, shipowners, and key maritime insurance providers to minimize market disruptions and help ensure the free flow of goods and capital.”[5]

Charterparty Risk

Charterparties often contain a war risk clause allowing the Owner/Master liberty to diverge from orders after an assessment of work risk to the vessel. Market leading clauses are the BIMCO War Risks Clause for Voyage Charter Parties 2025 (VOYWAR 2025), or the BIMCO War Risks Clause for Time Chartering 2025 (CONWARTIME 2025). Earlier editions of the clauses from 2013 or earlier are still used.

Although war risks clauses limiting the charterer’s right to order the ship to trade in areas in which she might be exposed to war risks are generally included on standard forms, the New York Produce Form itself does not include such a clause and therefore parties contracting on that form will typically include one as an additional clause.[6] For example, the NYPE 2015 Time Charter form incorporates BIMCO War Risk Clause CONWARTIME 2013 under Clause 34.

Clause (b) of CONWARTIME 2025 allows the master to avoid the risk of war risks generally, including that of physical damage to the vessel.

(b) The Vessel shall not be obliged or required to proceed to or through, and shall have liberty to leave an Area where it appears that the Vessel, cargo, crew or other persons on board the Vessel, in the reasonable judgement of the Master or the Owners, may be exposed to War Risks, whether such risk existed at the time of entering into this Charter Party or occurred thereafter. 

A similar liberty to diverge from orders exists in clause (c) of CONWARTIME 2025 but in respect of the risk of search or confiscation. To date, the main risks arising from the conflict between the USA/Israel and Iran appear to be physical attacks by missile/drone, but capture/seizure of vessels has been observed in previous decades by Iranian state agents.

VOYWAR 2025 sets out a number of different scenarios in relation to the time that war risks appear in relation to the performance of the voyage:

  • Clause (b) provides that if, prior to loading, it appears in the reasonable judgment of the master or owner that the vessel may be exposed to war risks, the Owner is entitled to cancel, if the Charterer is unable to nominate alternative safe loadport.
  • Clause (c) allows the owner or master to suspend loading or to remain in an area of war risk, and entitles them to proceed to a safe port of discharge, and allows the owner to recover any additional freight due.
  • Clause (d) allows the owner or master to follow an alternative route to avoid war risk areas, with a mechanism to adjust freight due.
  • Clause (e) sets out the obligations of a charterer to contribute to increased war risk insurance premia that may be actually due in respect of the cover put in place for the vessel’s exposure to a war risk area.
  • Clause (f) describes the liberty of the owner and master to follow directions from external authority, including from insurers (f(ii)). Actions taken by a master or owner in minimising risk will not be considered a deviation (h).

These clauses sit alongside the BIMCO War Cancellation Clause 2004 or (with similar wording in BARECON 2001). These clauses allow either party to cancel the charter on the outbreak of war between certain countries. Iran is not listed in the standard-form wording, but may be added to this list. A formal declaration of war is not necessary.

Risk Assessment

The above clauses refer to the risk assessment carried out by the owner or master that the vessel, cargo, or crew may be exposed to war risks. This judgement must be exercised in good faith and be objectively reasonable, with exposure requiring a real likelihood or serious possibility. However, this has to be judged by reference to known risk at the time of the charterparty formation. Writing in respect of risks in the Gulf of Aden, the U.K. Supreme Court has clarified: Herculito Maritime Ltd v. Gunvor International BV [2024] UKSC 2, (at 62)

If different war risks materialised in the Gulf of Aden or there was a change in the nature of the piracy risk, or a change in its degree sufficient to make it qualitatively different, then it may be that clause 39 could be relied upon, but not if there was no change in risk. (our emphasis).

What amounts to performance being qualitatively different is highly fact specific. Additionally, Charterparty wording may contain the words “always allowed” for a particular route/area which may reduce the ability of an owner to cancel a charter/vary a voyage.

In a U.S. Society of Maritime Arbitration case, a panel of arbitrators has construed the War Risks Clause of the EXXONVOY (1969) form of Tanker Voyage Charter Party phrase, “Charterers shall have the right to order the cargo . . . to be loaded . . . at any other safe port of loading . . . within the ranges of loading . . . ports” as requiring a charterer to select another load port within the range where during the approach voyage the originally charterer-nominated port was closed and became unavailable as a result of civil war in Angola.[7] There, the charterer originally instructed that the vessel proceed to a loading port at Cabinda Enclave, Angola. However, civil war broke out in Angola, rendering the port unsafe. The owner contended that the charter, under the war risks clause of the charterparty, had an obligation of loading at another safe port within the range of loading ports established under the charterparty. The charterer disagreed and argued that the war risks clause only gave charterer an option but not an obligation to designate another port and thus terminated the charterparty. The panel sided with the owner and held that the right of charterer to nominate an alternate port merely provided a facility for the charterer to avoid a breach situation in the event of war conditions occurring at a port already nominated, and in the over context in no way relieved the charterer of its primary obligation to provide an alternate port of loading within the range.

Frustration

For vessels currently in the Strait of Hormuz, charters may become frustrated where they are unable safely to exit the straits. In English law, frustration will only arise where performance is impossible or is radically different from the obligations originally contemplated. Increased time and cost on their own are insufficient, and frustration generally requires a consideration of the overall length of the charter. The consequence is not automatic, and whether any element of delay amounts to frustration is likely fact-specific to the circumstances of each charter (the Sea Angel [2007] EWCA Civ 547). A much more significant degree of delay is likely to be required for frustration of a time charter than a voyage charter.

For vessels outside the Strait that are unable to reach their destination port, and where no other destination ports can be nominated, it may be that the closure of the Strait can amount to frustration (Embiricos v Sydney Reid & Co [1914] 3 KB 45), on the basis that the commercial purpose of the voyage has ended. Equally, this is likely to be a fact-specific question to individual charters.

The leading U.S. case on frustration of charters is the U.S. Court of Appeals for the District of Columbia Circuit’s decision in Transatlantic Financing v. United States,[8] where the vessel owner sought to recover from the voyage charterer additional costs incurred in transporting cargo from the United States to Iran as a result of the closing of the Suez Canal. The owner’s argument was threefold: first, admiralty principles and practices require the court to imply into the contract the term that the voyage was to be performed by the ‘”usual and customary” route; second, the usual and customary route from Texas to Iran was, at the time of contract, via the Suez, so the contract was for a voyage from Texas to Iran via the Suez; and third, when the Suez was closed this contract became impossible to perform. The circuit court analysed the owner’s argument under the doctrine of impossibility of performance, which requires that at least three steps must be satisfied: first, an unexpected contingency must have occurred; second, the risk of the unexpected occurrence must not have been allocated either by agreement or by custom; and third,  occurrence of the contingency must have rendered performance commercially impracticable.

The court ultimately concluded that the first two requirements were  met. The closing of the Suez Canal was found to have been unexpected, and the risk of this contingency had not been allocated between the parties. However, the court concluded that the third requirement was not met because while the closing of the Suez Canal increased the cost of completing the voyage, and the additional cost was not so extreme as to have made performance of the charter commercially impracticable. As such, the court held that the doctrine had not been satisfied, and thus, there was no frustration of the charter.

Losses

Where a vessel is damaged or lost, two considerations arise. Owners and charterers may have agreed to allocate risk between them in the charter. Where owners have accepted a war risk, they will be generally responsible for losses, but where the vessel has, in breach of charter, become exposed to war risks as a result of following Charterers’ instructions, losses may be borne by charterers. Equally, where losses arise, there will be a question of whether there is war cover for the loss. These are fact-specific issues in individual charterers/contracts.

We are actively advising many shipping and trading companies affected by these issues. This note is considered general guidance and not legal advice.  The views represented in this article cannot be considered as legal advice or indicative of the situation for any specific contract.  That will require close assessment for the circumstances of that case.

 

References:

[1] https://www.ukmto.org/recent-incidents.

[2] https://www.maersk.com/stay-ahead

Eric Danoff, Marine Insurance for Loss or Damage Caused by Terrorism or Political Violence, 16 U.S.F. Mar. L.J. 61, 67 (2004).

[4] Id.

[5] https://www.dfc.gov/media/press-releases/dfcs-political-risk-insurance-and-guaranty-products-will-support-private

[6] See Andrew Baker et al., Time Charters 138 (8th ed. 2025).

[7] Raymond A. Connell, Charter Party Termination and the Approach Voyage, 25 Tul. Mar. L.J. 469, 488 (2001) (citing In re M/T Amoco Texas City, SMA No. 1153A (1977)).

[8] 363 F.2d 312, 1966 AMC 1717 (D.C. Cir. 1966); Andrew Baker et al., Time Charters 529 (8th ed. 2025).