Mind the gap: Strait of Hormuz disruption - risk allocation for traders and charterers

How charterparties, sale contracts, bills of lading, and Incoterms determine who bears the cost

Operational disruption at sea rarely affects one party in isolation. For traders and charterers, the immediate questions are commercial rather than operational: can the cargo still be delivered; who bears the additional freight and insurance costs; and does the sale contract allocate those risks differently from the charterparty?

The recent disruption to shipping through the Strait of Hormuz illustrates this point. Commercial transit has been significantly affected by conflict and heightened security risks, with vessels delayed, discharge ports changed, and war-risk premiums increasing sharply. Where cargo cannot be delivered as originally contemplated, owners, charterers, sellers, and buyers may all incur additional expenses, but not necessarily under the same contractual arrangements.
  

Identify the contractual obligations

The starting point is to identify the relevant contracts, the parties, the incorporated terms, and the governing law.

A typical international trade involves at least two distinct contractual relationships: the contracts of carriage (charterparty and bills of lading) and the contract of sale, often incorporating standard trading terms in addition to the agreed Incoterm. These contracts perform different functions and frequently allocate risk differently.
  

Contracts of carriage

Most charterparties permit owners, where the contractual threshold is met, to refuse to proceed to an unsafe port, to await revised orders, or to discharge at an alternative, safe port. Whether those rights arise depends upon the contractual wording, including any notice requirements and nomination procedures.

Where cargo is discharged at an alternative port, additional costs may include freight, storage, transhipment, inland transportation, and additional insurance. Whether those costs are recoverable depends on the charterparty terms.

Where discharge occurs without production of the original bills of lading, owners will usually require a letter of indemnity (LOI). Parties should use club-approved wording wherever possible, ensure any chain of LOIs is genuinely back-to-back, and keep in mind that an LOI cannot prejudice the rights of the lawful bill of lading holder.
   

Contracts of sale: Incoterms and BP GTCs

Under CIF and FOB Incoterms, risk generally passes when the cargo is shipped, whereas under destination terms such as DAP and DDP the seller ordinarily bears the risk until delivery.

While the general position is that the party bearing the risk will bear the additional transportation costs, Incoterms do not comprehensively allocate the consequences of exceptional events such as a prolonged closure of a major shipping route.

For physical crude oil trades, for example, transactions are frequently concluded on the BP Oil International Limited General Terms and Conditions for Sales and Purchases of Crude Oil and Petroleum Products (2015) ("BP GTCs"). These supplement the Incoterm through detailed provisions governing delivery obligations, force majeure, notices, suspension of performance, and termination.

Under the BP GTCs, for example:

a. Under a FOB contract, both risk and property will pass from a seller to a buyer when the product passes a vessel’s permanent hose connection at the loading terminal;

b. Under a CFR or CIF contract, risk will pass when the product passes a vessel’s permanent hose connection at the loading terminal, but property will pass at a different point in time depending on whether it is a full cargo lot or a separately ascertainable part cargo lot; and

c. Under a DAP contract, both risk and property will pass when the product passes the vessel's permanent hose connection at the discharge terminal.

The allocation of Hormuz-related costs will therefore depend on the interaction between the BP GTCs, the agreed Incoterm, and the underlying delivery obligations. A seller whose charterparty permits discharge at an alternative safe port may be protected against the owner while remaining unable to recover diversion costs from its buyer. Conversely, a seller whose obligations are suspended under the BP GTCs may avoid liability to its buyer while continuing to incur charterparty liabilities.
   

Force majeure under the BP GTCs

For crude oil trades concluded on the BP GTCs, the starting point is section 65, but it must always be read together with the express terms of the contract.

Events such as war (whether declared or not), riots, strikes, boycotts, lock-outs, and reduction in suppliers’ sources of supply of products, may all be capable of engaging section 65, depending upon the facts. However, the existence of a force majeure event does not, by itself, determine the contractual outcome. The impediment must be beyond the party’s control, and can include delay, hindrance, reduction in, interference with, and/or curtailment or prevention of a party’s performance of its obligations resulting from the event.

First, therefore, the event must genuinely affect contractual performance. A significant increase in freight rates, war-risk premiums, or insurance costs will not necessarily constitute force majeure if delivery remains legally and physically possible. As the market adapts and routes become available (albeit limited), that distinction between prevention and increased expense is likely to become increasingly important.

Secondly, compliance with the contractual notice requirements is critical. A party seeking to rely upon section 65 should notify its counterparty promptly, identify the relevant event, and explain the actual or anticipated effect upon performance. Parties should also maintain contemporaneous records explaining why operational decisions were taken, particularly where they rely upon changing security assessments.

Thirdly, section 65 principally suspends affected contractual obligations while the force majeure event continues, unless the event renders performance impossible, in which case immediate termination is permitted without any liability. What clause 65 does not do, however, is reallocate the financial consequences of continued performance. If a seller elects to complete delivery by non-contractual performance i.e. by rerouting a cargo, discharging at an alternative port, or arranging onward transportation, the recoverability of those additional logistics costs depends upon the wider contractual allocation of risk.

Unless the contract provides otherwise, an obligation to use reasonable endeavours does not generally require a party to accept fundamentally different contractual performance merely because doing so would avoid the force majeure event or reduce the parties' losses.¹>

Finally, force majeure should not distract parties from their separate contractual and regulatory obligations. Sanctions screening, payment restrictions, and war-risk insurance should all be reviewed independently of any force majeure analysis.
   

Safe ports

Many time charterparties require charterers to order the vessel only to safe ports. Safety extends beyond physical characteristics and includes political or military risks where those create a real danger to the vessel or crew.²

The warranty is prospective rather than continuing. A port that was safe when nominated does not retrospectively become an unsafe nomination simply because conditions subsequently deteriorate. However, if the port becomes unsafe before the vessel arrives, charterers should issue fresh voyage orders to a safe alternative port.

Most sale contracts will also include an express safe port warranty (unless delivery takes place at e.g. the seller’s premises under Incoterms such as EXW and FCA). Charterers will want to ensure that the sale contract warranty mirrors the charterparty warranty to avoid any liability gap, in particular in relation to the discharge port where the port is nominated by the buyer, leaving the seller/charterer with less control.
  

War-risk clauses

The BIMCO CONWARTIME and VOYWAR clauses remain the principal contractual mechanisms governing war-risk decisions under time and voyage charters.

They permit owners, acting on an honest and objectively reasonable assessment, to refuse unsafe voyage orders or require an alternative destination where the vessel, cargo or crew may be exposed to war risks.³ Where validly invoked, charterers generally bear the contractual consequences specified by the clause, including additional war-risk premiums and other recoverable costs.

If charterers want to pass those costs to the buyer, they must provide for this expressly in the sale contract.
  

Practical takeaways

• Analyse the charterparty and the sale contract separately; rights under one do not automatically pass through to the other.

• Check the agreed Incoterm, but read it alongside any applicable GTCs and any bespoke delivery provisions.

• Where the BP GTCs apply, analyse section 65 together with the delivery obligations before assuming that additional logistics costs can be recovered from your counterparty.

• Reassess safe port nominations as charterers.

• Preserve contemporaneous evidence of operational decisions, security assessments, and communications.

Click here to read previous editions of Commodities In Focus. This is issue 172.
 

¹ MUR Shipping BV v RTI Ltd [2024] UKSC 18.
² Kodros Shipping Corporation v. Empresa Cubana De Fletes (The "Evia" (No. 2)) [1982] 2 Lloyd's Rep 307
³ Pacific Basin IHX ltd v Bulkhandling Handymax AS (The Triton Lark) (No.1) [2011] EWHC 2862 (Comm)