Strait talk: The Hormuz crisis and the role of international arbitration in geopolitical energy disruptions

When a large portion of the world’s oil supply comes to a halt overnight, what legal and institutional tools does the international community have to respond? The Hormuz crisis provided a recent case study and raised questions of how international arbitration can respond to (and evolve to address) such situations.

Global energy supply chains depend on a limited number of critical maritime corridors and fixed export and import infrastructure. Prior to the start of the US-Iran war, roughly 20% of the world’s oil supply flowed through the Strait of Hormuz. Without a realistic substitute or alternative, the closure of the strait exposed the vulnerability of global energy infrastructure. Fuel shortages and surging transportation costs followed, transforming a regional geopolitical confrontation into an international energy crisis.

But the strait is not a unique case. Global supply chains remain dependent on a handful of critical corridors, any one of which can be impacted by geopolitical conflict, security crises, or climate-related disruptions. The question is not whether such events will occur in the future, but whether existing legal frameworks are equipped to manage the fallouts.

So, what option do affected parties have when such crises occur?

The role of emergency international arbitration

In the context of international dispute resolution, some tools already exist. Emergency arbitration procedures under international arbitral institutions such as the International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), American Arbitration Association-International Centre for Dispute Resolution (AAA-ICDR), and London Centre for International Arbitration (LCIA) offer expedited relief and provisional measures that can preserve contractual rights while the proceedings are pending.

For parties (including international energy companies) that may be facing compounding losses from supply disruptions, the ability to obtain a binding determination quickly can mean the difference between managing a crisis and suffering irreversible financial damage. Expedited emergency arbitration procedures are available across many arbitral institutions and can yield an award within six months (or less) of commencement – and sometimes as quickly as a few weeks. Major arbitral institutions have recognized the need for expedient emergency arbitration; the ICC Rules contain provisions on Emergency Measures and appointing an Emergency Arbitrator, the SIAC Rules have recently been amended to strengthen the Emergency Arbitrator procedure, the AAA-ICDR was the first prominent international arbitration provider to include procedures for appointment of an Emergency Arbitrator prior to formation of a full arbitral tribunal, and the LCIA Rules also contain provisions accounting for an Emergency Arbitrator.

In the context of emergency arbitration, parties can seek interim measures, which provide parties with targeted protective remedies while proceedings are pending. Under most major institutional rules, emergency arbitrators are empowered to order a broad range of interim relief, including orders to maintain or restore the status quo, prevent imminent harm, and/or preserve assets. In the energy context, this can be particularly consequential. For example, an interim order preserving the status quo or freezing the proceeds of a disputed shipment can prevent or reduce damages. Many institutional rules also allow parties to seek interim relief from national courts without waiving their right to arbitration.

And because emergency arbitrations are procedurally less complex – with tighter timelines, streamlined evidentiary processes, and fewer interlocutory stages – the cost burden on all parties can be meaningfully reduced. This is a structural advantage that can make arbitration a more cost-effective remedy than litigation across multiple national jurisdictions.

Potential international arbitration claims

While the viability of any particular dispute depends heavily on the specific contract language agreed between the parties, the Hormuz crisis brings several potential claim avenues into focus.

Force majeure

The most immediate claims arising from the strait’s closure are likely to center on the validity and scope of any force majeure claims. In the energy context, force majeure disputes often arise from disagreements as to whether an unforeseen disruption (in this case, the closure of the strait) rendered performance under the contract impossible, or merely impracticable and more burdensome.

This distinction matters enormously. As a result of geopolitical events in recent years, force majeure claims have surged across international arbitration, and the Hormuz crisis is poised to accelerate that trend further across the Middle East and beyond. The pattern is already emerging: In early March, as a result of the strait’s closure, QatarEnergy declared a force majeure, leaving Asian buyers – who depend on Qatar for more than 80% of their gas imports – scrambling to replace lost supply in an already strained market.

This is likely to continue as the effects of the Hormuz crisis play out. Sellers will assert strong force majeure defenses on the basis that physical prevention, not mere commercial inconvenience, excused non-performance. Buyers, meanwhile, may pursue frustration claims, arguing that the strait’s closure fundamentally destroyed the contractual foundation underpinning their long-term agreements. Sellers will counter that the disruption is temporary and falls within the risk allocation the parties already agreed upon.

Tribunals can expect to grapple with disputes centered on questions of causation and notice, the adequacy of mitigation efforts, the attribution of loss, and, critically, as to what qualifies as a force majeure event and for how long. The disputes arising out of the Hormuz crisis may well reshape how these clauses are drafted, interpreted, and litigated for years to come.

Breach of contract

In addition to force majeure declarations, breach of contract claims likely will arise out of the Hormuz crisis. Market disruptions like the strait’s closure create downstream economic impacts on existing contractual obligations, especially when it comes to delays and disruptions. When the price to carry out the contracts exceeds the contract price itself, sellers may be motivated to delay or cancel deliveries as originally contracted, giving rise to failure-to-supply or failure-to-take breach of contract claims.

The central legal question in these disputes will not simply be whether performance failed to occur, but why. Arbitral tribunals will be required to conduct granular factual inquiries into whether the constraints genuinely prevented performance or whether the non-performing party made a commercially motivated election to breach. Tribunals will therefore need to assess the availability and feasibility of alternative supply routes, the reasonableness of mitigation efforts undertaken, and the degree to which prevailing market conditions shaped the decision not to meet contracted volumes.

The quantification of damages in these disputes will also present complexities. Claims are likely to encompass the cost of replacement supply that would be procured at higher spot-market prices, lost resale opportunities in downstream markets, and additional transportation and procurement costs attributable to disrupted deliveries. Where long-term contracts are involved, the gap between contracted and market prices at the time of breach may result in very high damages valuations, and could create difficult questions about foreseeability of damages and/or the allocation of risk between the parties at the time of contracting.

Pricing disputes

The Hormuz crisis may also generate pricing disputes. Long-term contracts are negotiated against a specific set of market assumptions, and when those assumptions are changed, the pricing in those contracts can become disconnected from commercial reality. Global liquified natural gas (LNG) prices have risen sharply since the Strait’s closure, driven not only by direct supply shortfalls but also by surging demand from buyers seeking substitute supplies.

This creates a likelihood of pricing-review claims. Where renegotiation fails, parties are likely to invoke contractual hardship provisions, change-in-law clauses, exceptional-event mechanisms, or formal price-review triggers. Tribunals will face the difficult task of distinguishing genuine market changes that warrant contractual adjustment from ordinary price volatility that falls within the commercial risk each party assumed at the time of contracting.

Additional safeguards: Contractual tools and adaptations to geopolitical risks

The closure of the strait also may raise concerns for potentially affected parties that their existing contractual language may not be adequate protection against the risk facing global energy supply chains. Thus, in addition to pursuing any international arbitration claims, potentially affected parties should also look forward: They should consider stronger contractual provisions for future crisis scenarios and put in place protective action plans that can be undertaken immediately if or when new disruptions occur.

Strengthening contractual frameworks

Parties operating in the energy sector should move urgently to review their current contractual language and develop more robust contractual provisions. Generic or standard-form language is unlikely to provide adequate protection.

Beyond strengthening the force majeure provisions, contracts should also be carefully structured to specify notice requirements and associated timelines, mitigation obligations and their limits, risk allocation rules between the parties, suspension rights and termination triggers, and the legal and commercial consequences of prolonged disruption. Arbitration clauses also warrant close scrutiny, and parties should ensure that their dispute-resolution provisions contemplate emergency-arbitration options and are compatible with the rules of their chosen arbitral institution.

Immediate protective measures

Affected parties with contracts currently in force may also wish to consider some of the other possible actions:

• Notice periods: Where contractual performance has been, or may foreseeably be, affected, parties should issue any required contractual notices without delay. Timely notice is often a prerequisite to relying on force majeure, hardship, or other contractual relief provisions. Failure to comply with applicable notice requirements may prejudice (or even prevent) otherwise valid contractual claims or defenses.
• Evidence preservation: Parties should systematically preserve all documentation relating to any disruption, including carrier communications, port authority delay notices, sanctions updates, insurance correspondence, and any evidence of mitigation efforts undertaken. In arbitral proceedings, the evidentiary record compiled in the early stages of a disruption can prove determinative.
• Mitigation strategy: Parties should actively evaluate and document reasonable steps to mitigate the effects of disruption, including substitute supply or alternative transportation. Most legal systems and arbitral tribunals expect parties to take commercially reasonable mitigation measures, and contemporaneous evidence of those efforts may be critical in any subsequent dispute.
• Coordinated negotiation strategy: Parties should engage with counterparties at an early stage to discuss anticipated delays, alternative performance arrangements, revised delivery schedules, or temporary contractual accommodations. Early commercial engagement may reduce the likelihood of disputes and demonstrate good-faith efforts to mitigate losses. However, negotiations should be carefully coordinated with legal counsel. Statements concerning the reasons for non-performance, responsibility for delays, or the availability of force majeure or hardship relief may later be relied upon in arbitration or litigation as admissions or evidence affecting the parties’ contractual rights and defenses.

Engaging leading international counsel

Finally, early engagement of international counsel with experience in cross-border energy disputes is an essential safeguard. The Hormuz crisis has demonstrated that multijurisdictional crises implicate a complex intersection of contract law, arbitral procedure, sanctions regimes, and insurance frameworks that require coordinated, issue-specific legal advice. The immediate involvement of experienced counsel that can navigate such multijurisdictional crises can materially affect both the strategy and outcome of any dispute.

Taken together, these measures serve a dual purpose: They reduce the likelihood that disputes will reach arbitration at all, and they ensure that parties are rigorously prepared if arbitration cannot be avoided.

Shira Nash, a summer associate in the Washington, DC, office, contributed to this client alert.

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McDermott Will & Schulte’s international arbitration team has experience resolving international commercial and investment disputes under all major international arbitration institutions and rules. Our success in international arbitration has been recognized globally by all of the leading legal publications around the world, including, among others, The Global Arbitration Review, The Legal 500, Chambers, and Who’s Who Legal. We are ranked in the GAR 100 as being one of the best firms in the world for international arbitration disputes, and client testimonials in The Legal 500 proclaim that we are an “exceptionally strong team of very experienced individuals” and “always do the utmost to secure a win for [our] clients.” More specifically, our team has a demonstrated track record of securing emergency relief and favorable outcomes in complex, fast-moving disputes that crises like Hormuz produce.