Legal challenges to Iran’s commerce amid US-Israeli war of aggression
From sanctions to force majeure, insurance, and redesign of foreign trade contracts
Researcher at Center for
Middle East Strategic Studies
The impact of war on the trade of Middle Eastern merchants manifests itself in foreign trade contracts before it becomes discernible in customs statistics. A vessel that does not sail, a bank that refuses to accept documents, an insurer that restricts war-risk coverage, or a port that is no longer accessible can disrupt a chain of contractual obligations extending from seller to buyer and from bank to insurer.
For this reason, one of the most consequential effects of the United States–Israeli war on Iran should not be sought exclusively in declining oil exports, difficulties in importing goods, or rising transportation costs; a more consequential dimension of the matter materializes where international law, contract law, sanctions, and maritime risks converge.
Developments in recent months have transformed this issue from a theoretical discussion into a significant challenge for Iranian commerce. A sharp decline in commercial maritime traffic along the region’s routes, heightened security risks for vessels, and difficulties in obtaining insurance coverage have presented Iranian exporters and importers with a succession of legal and contractual questions.
Under such circumstances, the principal question is no longer merely, “Can Iran continue its exports or imports?” The more consequential question is this: if war, sanctions, the closure of a maritime route, increased insurance risk, or governmental intervention prevents the performance of an Iranian commercial contract, who bears responsibility and who must absorb the cost of such disruption? The answer is not straightforward; international law does not automatically equate every war with “force majeure,” nor does it recognize every increase in costs as a legitimate ground for terminating a contract. The point of departure is the text of the contract and the law governing it.
War does not automatically extinguish a contract
One of the most prevalent misconceptions in international commerce is that, upon the outbreak of war, a contracting party is automatically exempted from its obligations. No such absolute rule exists. In international commercial law, “force majeure” is generally invoked when an event beyond the obligor’s control renders performance impossible or, under the circumstances stipulated in the contract, incapable of being performed, and the obligor has been unable, by reasonable means, to prevent the event or overcome its effects. Where the impediment is temporary, the exemption is generally confined to the corresponding period.
Therefore, an important distinction exists between “the occurrence of war” and “the legal effect of war on a specific contract”. Suppose that an Iranian company has undertaken to deliver goods to a Middle Eastern port on a specified date. If war causes the maritime route to close and no reasonable alternative route exists, a force majeure argument may be substantial. However, if the maritime route remains open and only transportation costs have increased, the matter does not readily fall within the scope of force majeure.
In the latter circumstance, “Hardship,” or economic difficulty, may arise as an issue; that is, performance of the contract remains possible, but its conditions have become severely detached from the initial economic equilibrium. In international commercial law, force majeure and hardship are two distinct concepts. The former is principally employed to provide exemption from liability arising from non-performance, whereas the latter is more closely associated with renegotiation, adjustment, or contractual reconfiguration.
This distinction is of particular importance for Iranian commerce. In many export and import contracts, the principal difficulty is not “impossibility”; rather, it is a combination of increased costs, delays, route alterations, lack of banking access, higher insurance rates, and sanctions exposure. If all these circumstances are included, without differentiation, under the heading of force majeure, the likelihood of failure in contractual litigation increases.
Sanctions; force majeure or legal impediment?
The most intricate dimension of the matter emerges where war intersects with economic sanctions. Sanctions are not merely an economic impediment. In certain legal systems, compliance with sanctions constitutes a legal obligation. Consequently, a bank, shipping company, or insurer may be practically incapable of executing a transaction; not because it lacks a commercial inclination to do so, but because executing the transaction could expose it to legal liability. In this situation, the question must be whether non-performance arises from “sanctions” or from “the contractual party’s commercial decision to avoid sanctions risk”. These two circumstances are not legally equivalent.
If a contract was concluded at a time when the relevant sanctions already existed and the parties were aware of them, subsequent reliance on those same sanctions as an unforeseeable event will be more difficult. However, if new sanctions are imposed after the conclusion of the contract and genuinely render performance unlawful, the legal position will be different. Here, the issue of “foreseeability” assumes fundamental importance.
In commerce with Iran, sanctions are no longer an entirely alien and inconceivable phenomenon. This reality may acquire significance for a court or arbitral tribunal in the future. Could a professional merchant contracting with Iran have contemplated the possibility of intensified sanctions at the time of contract formation? This question is particularly significant with respect to long-term contracts. In such contracts, sanctions clauses should not merely state, “In the event of the imposition of sanctions, the parties shall bear no liability.” It must be specified which sanctions, imposed by which country, with what effect, and to what extent, may suspend performance of the contract.
Strait of Hormuz; where the Law of the Sea and contract law converge
For Iran’s foreign trade, the issue of the Strait of Hormuz is not merely a security issue; it is a contractual issue. Whenever the passage of a vessel encounters the risk of attack, seizure, route alteration, or a substantial escalation in insurance costs, a constellation of legal questions arises concerning delivery dates, transfer of risk, liability for losses, and the obligations of seller and buyer.
Under such circumstances, a common error is to assume that Incoterms alone resolve all the difficulties; they do not. Incoterms rules are principally designed to determine the place of delivery, costs, and transfer of risk in a transaction. However, these rules themselves do not determine issues concerning force majeure, sanctions, export and import prohibitions, or many of the consequences of contractual breach. These matters must be regulated in the contractual text and under the law governing the contract.
This point is vital for an Iranian exporter. In an FOB contract, for example, the moment of risk transfer differs from that under a contract in which the seller assumes a broader obligation concerning transportation. In CIF contracts as well, the seller must arrange the stipulated insurance, but this does not mean that every form of war-related risk is automatically covered by insurance. In fact, the use of an Incoterm without revisiting the clauses concerning war, sanctions, and insurance can transform an ostensibly standardized contract into one of considerable risk.
Insurance; the link that may bring the entire chain to a halt
In maritime commerce, goods may be legally eligible for export, a vessel may be technically ready to sail, and the buyer may likewise be prepared to make payment; however, if the insurer does not provide the requisite coverage, the transaction may effectively come to a standstill. This is precisely where war, sanctions, and insurance become interconnected. Marine insurance under wartime conditions can expand its capacity to cover war risks, but such coverage is generally contingent upon risk assessment, sanctions screening, and compliance with applicable regulations.
This development conveys an important message: the insurance market does not necessarily regard war risk as uninsurable; rather, it transforms it into a risk that must be separately priced and managed. Conversely, any costs or charges associated with passage through sensitive maritime routes may also become an insurance and sanctions issue.
Therefore, in future Iranian contracts, the sentence “The seller is obligated to procure transport insurance” will no longer suffice. It must be specified what type of insurance, with what coverage limit, against which risk, under what conditions, and subject to which exclusions, will be procured. It must also be established who bears responsibility if the insurer cannot provide coverage because of sanctions or the regulations of the country in which it operates.
Iranian foreign trade and the imperative of contractual redesign
The new reality is that Iran’s foreign trade contracts cannot be drafted as though they belonged to an era of stability. A future contract must regard war not merely as an “event,” but as a multilayered risk. The first layer is war and physical security. The second is sanctions and financial regulations. The third is transportation and ports. The fourth is insurance. The fifth is banking and payment, and the sixth concerns legal disputes over which of these factors has actually impeded contractual performance. If these six layers are not incorporated into the contract, future disputes will be almost inevitable. For example, Iranian export contracts should specify more precisely what legal status is created by the “closure of a transportation route”. Must the seller identify an alternative route? Over what distance? At what cost? Is a 20% increase in transportation costs tolerable, while a 50% increase triggers renegotiation? If no safe route exists, is the contract suspended or terminated? If an alternative route exists but causes several weeks of delay, does force majeure remain operative? These are questions whose answers cannot be deferred until the crisis occurs.
In future contracts, force majeure and hardship clauses must be designed in proportion to the nature of the transaction, and complex commercial risks in a sanctions- and war-affected environment cannot be managed merely by copying a generic provision from other contracts.
From ‘termination’ to ‘contractual resilience’
Perhaps the most consequential change in perspective for Iran’s foreign trade lies precisely here. Under ordinary conditions, a contract is drafted to ensure performance. Under conditions of war and sanctions, a contract must, in addition to ensuring performance, specify how the transaction is to remain viable during a crisis. This signifies a transition from contracts predicated upon “termination after a crisis” to contracts predicated upon “resilience during a crisis”. Under this model, a contract can contain a hierarchy of solutions: first notification, then negotiation, followed by temporary suspension, then alteration of the route or method of transportation, subsequently adjustment of the price or delivery time, and finally, if the impediment is persistent and fundamental, termination of the contract. Such a mechanism prevents an immediate dispute; because the parties know in advance what consequence attaches to each stage.
More precise provisions should also be incorporated concerning “change in law”. If a country imposes new sanctions, a bank prohibits a transaction, or a maritime route becomes subject to security restrictions, the contract should specify whether this circumstance creates merely a right of suspension or also a right of termination. In contracts connected with Iran, even the choice of governing law and the arbitral forum assumes greater significance. An arbitration clause that merely identifies an arbitral institution is insufficient. The question must be whether the arbitrator can disregard the sanctions law of a third country. Will enforcement of the judgment be possible in a country that imposes the sanctions? Will payment of arbitration costs itself encounter financial restrictions?
In reality, war can transform a dispute that appears “commercial” into a dispute concerning multiple legal systems. The issue is not confined to exports; imports are exposed to the same risks. This discussion should not be confined exclusively to oil and petrochemical exports. For an Iranian importer, the risk may originate elsewhere: the foreign seller possesses the goods, but its bank is unwilling to receive payment from Iran; or the shipping company is unwilling to enter the region; or the insurer does not provide the requisite coverage; or the goods become stranded at an intermediate port. Under these circumstances, the important question is not “Who is at fault?” but rather what mechanism the contract has contemplated for such a situation.
This issue assumes amplified importance in trade predicated upon banking documents. War may subject banking and documentary operations to delay and disruption, but the rules governing letters of credit and other instruments of documentary trade do not automatically cease to exist. This point is extremely important: war may render performance of a transaction difficult, but “difficulty” is not synonymous with “legal exemption”.
A warning concerning force majeure
The experience of recent crises conveys an important lesson to Iranian economic actors and non-Iranian merchants conducting commerce with Iran: force majeure should not become the final bullet of a contract. A party that declares on the first day of a crisis, “War has occurred, so the contract is over,” may subsequently encounter the argument that it could have performed part of its obligation through route alteration, reasonable delay, alternative transportation, or negotiation. Conversely, a buyer cannot merely invoke late delivery to impose all responsibility upon the seller if it is established that the transportation route was genuinely unsafe and that no reasonable alternative existed.
Therefore, in future disputes, courts and arbitral tribunals will likely examine the operational particulars more closely than before: Which routes were open? When did they close? What was the cost of an alternative route? Was insurance available? What precisely did the sanctions prohibit? Could the bank execute the payment? And, most importantly, what did the parties know or ought to have known at the time of contract formation? This is the point at which contract law becomes disentangled from foreign policy and is transformed into commercial risk management.
Strait of Hormuz and the future of Iranian trade
The Strait of Hormuz is now more than a strategic waterway; it has become one of the most consequential legal and economic variables affecting regional commerce. However, even if the maritime route reopens at a particular juncture, the difficulties confronting foreign trade will not terminate with the reopening of the waterway. Insurance rates may remain elevated, banks may continue to exercise caution, shipping companies may prefer alternative routes, and foreign counterparties may demand more stringent conditions in new contracts. For this reason, the restoration of trade to normal conditions does not necessarily signify the restoration of costs and risks to their pre-war levels.
Law ultimately returns to the contract. The American–Israeli war on Iran has once again revealed an old reality: international law cannot resolve every difficulty confronting a merchant, but it can clarify the boundaries of responsibility and risk. Sanctions may impede a contract, but they do not, by themselves, answer whether the contractual obligation is suspended or extinguished. The closure of a maritime route may render contractual performance impossible, but the ultimate answer depends upon the text of the contract, the governing law, and the practical circumstances. Increased insurance costs may render a transaction unprofitable, but not every loss constitutes force majeure, and war may profoundly alter contractual conditions, but not every economic alteration creates a right of termination.
From this perspective, perhaps the most important lesson for Iran’s foreign trade lies not in any particular statutory provision, but in a transformation of the way contracts are conceived. Iran’s foreign trade contracts must be redesigned on the basis of the country’s geopolitical reality; a contract drafted for an environment without war, without fluctuating sanctions, and without maritime disruption is fragile in the face of contemporary crises.
Iran requires more than alternative routes, additional vessels, or more expensive insurance to preserve its exports and imports. It requires a new legal architecture for foreign trade; an architecture in which sanctions, war, maritime disruption, insurance, banking, route alteration, force majeure, hardship, governing law, and arbitration are contemplated together from the outset. If war is regarded merely as a temporary event, upon the cessation of hostilities, we will return to the same old contracts. But if it is understood as an indication of a transformation in Iran’s commercial risk environment, contracts can become instruments of resilience.
In today’s global economy, trade security does not merely mean that a vessel can sail. Genuine security arises when, if the vessel does not sail, if the bank does not transfer the funds, if the insurer does not provide coverage, or if a new sanction enters the equation, the parties know in advance what rights they possess, what obligations they bear, and who will absorb the cost of the crisis. This may be the most important legal lesson of war for Iran’s foreign trade: war can alter the routes of vessels, but contractual ambiguity must not be permitted to obstruct the legal pathways of commerce as well.