In Brief:
- Under standard charterparty forms, the Hormuz toll is likely to fall on charterers under time charters and on owners under voyage charters, creating significant unrecovered exposure for owners fixed before March 2026 on voyage terms; the war risk clauses in BIMCO's CONWARTIME and VOYWAR forms, most commonly in their 2013 editions for existing fixtures, provide the primary contractual mechanism for refusal, and the combination of IRGC military enforcement and discriminatory access is likely to satisfy the war risk threshold.
- Under sale contracts, CIF sellers bear the toll cost and will generally remain bound, subject to any governing law relief mechanisms, by their delivery obligations even where the route is blocked and payment would expose them to sanctions liability. UAE Civil Code Article 249, however, provides materially wider relief, allowing courts to rebalance contracts rendered excessively onerous without requiring full impossibility and on a mandatory basis.
- Hull insurance war risk cover raises an unresolved Clause 4.1.6 dispute in which underwriters will argue that physical interdiction for toll non-payment constitutes a 'finance cause' excluded from cover, while the assured's primary argument is that coerced military seizure by a designated terrorist organisation in an active conflict zone is a war peril, not a financial one.
Introduction
The transit toll on the Strait of Hormuz is unlawful under established frameworks of international law. UNCLOS Articles 37 to 44 establish a right of transit passage which may not be suspended and do not permit the imposition of transit tolls or charges as a condition of passage. Iran's discriminatory access regime provides an additional and independent violation of UNCLOS Article 42(2). Paying the toll may constitute a criminal or civil offence for entities with connections to the United States, the European Union, or the United Kingdom, each of which maintains a sanctions framework designating the IRGC as a terrorist organisation or sanctioned entity. Entities without such direct connections are not subject to those frameworks in the same way, but may nonetheless face US secondary sanctions exposure if the payment involves significant transactions with IRGC-affiliated entities. The question of jurisdictional nexus requires careful analysis in each case, and no entity should assume it falls entirely outside the applicable frameworks without obtaining specific legal advice. The full international law and sanctions analysis, together with immediate practical steps, is set out in Part 1 of this series. The two-week ceasefire agreed on 8 April 2026 has not resulted in a material reopening. Lloyd's List reports that Iran continues to assert control through an evolving toll system, and major operators have confirmed insufficient certainty to resume normal transits. This article addresses the commercial, contractual, and insurance consequences of the enforcement gap.
Who Bears the Cost? Contract Allocation Across Charter and Trade Terms
Assuming a vessel transits, whether by paying the toll, or accepting the risk of refusal, the question of who bears the financial consequences falls to be resolved under the applicable contract. The answer differs materially depending on whether the fixture is a time charter or voyage charter and on the trade term governing the underlying sale.
Under standard time charter forms, voyage costs are the charterer's account. New York Produce Exchange Form 2015 (NYPE 2015) Clause 7 allocates to charterers all "port charges, compulsory/customary pilotages, canal dues, towages and all other usual expenses." Shelltime 4 Clause 7 similarly requires charterers to provide and pay for "canal dues and all charges other than those payable by Owners under Clause 6." The toll does not fit neatly into any existing category, but the catch-all language in both forms is broad enough to capture a compulsory transit charge imposed as a condition of passage. Under time charter terms, the toll is likely to fall for charterers’ account.
Under voyage charter terms, owners accept the freight rate in exchange for completing the voyage, and unanticipated mid-voyage transit costs imposed as a condition of passage fall on owners unless expressly allocated otherwise. The Hormuz toll, arising during transit rather than at a loading or discharge port, is not captured by any standard Asbatankvoy provision and will typically fall on owners as an unrecovered voyage cost. Owners fixed before March 2026 on voyage charter terms face unrecovered exposure unless their contracts contain a specific extraordinary charges clause.
Under BIMCO's CONWARTIME 2013 (time charter) and VOYWAR 2013 (voyage charter), owners are not obliged to proceed through any area where the vessel may be exposed to war risks. The definition of war risks in both forms expressly includes blockades, whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, language that precisely describes Iran's discriminatory access regime, which applies different conditions and charges based on flag state nationality and ownership while completely prohibiting passage for certain flags. In the current environment, where IRGC vessels have physically interdicted non-compliant tankers and where vessels have been attacked following refusal to comply, these circumstances satisfy the contractual threshold, and owners who invoke these provisions are on firm ground.
Under cost, insurance and freight (CIF) contracts, the seller bears all freight and transit costs to the named destination, including any toll imposed mid-voyage. Increased transit costs arising from route conditions or unexpected charges do not ordinarily discharge the CIF seller's delivery obligation, and the contract continues in force regardless of the financial burden the toll imposes. Under free on board (FOB) contracts, risk and cost pass to the buyer at the point of loading. Under UAE Federal Decree-Law No. 50 of 2022 on Commercial Transactions, Article 135 confirms this FOB allocation: the seller pays all costs and bears all risk until the goods cross the vessel's rail during loading, and all amounts and risk arising thereafter fall on the buyer. Incoterms 2020 are silent on tolled waterways and contain no force majeure provisions of their own. The governing law of the sale contract therefore determines what relief is available when the usual route becomes subject to novel charges.
For parties whose contracts are governed by UAE law, Article 249 of the Civil Code is the most powerful avenue for relief. It does not require impossibility, only excessive onerousness threatening grave loss from circumstances that could not have been foreseen. Critically, it is generally treated as mandatory. The toll alone, approximately $1 per barrel on cargo worth $70 to $80 per barrel, may not cross the "grave loss" threshold in isolation. The cumulative burden of the toll, elevated war risk premiums, cargo delay costs, and potential sanctions exposure assessed together presents a materially stronger case for judicial rebalancing.
One important qualification applies to the unforeseeability requirement under Article 249 and the governing law of the contract. On 22 June 2025, Iran's parliament voted in favour of closing the Strait of Hormuz, a measure widely reported in international media at the time. War risk insurance premiums for Gulf transit began rising materially in the months that followed, before the outbreak of hostilities in February 2026. For contracts entered into or renewed after June 2025, a counterparty will likely argue that the risk of a Hormuz disruption was reasonably foreseeable and that the unforeseeability condition for hardship relief is not satisfied. The strength of that argument increases the closer the contract date sits to the current crisis. Parties should identify the precise date of contracting and assess whether the specific nature of the disruption, namely a formal toll regime backed by military enforcement and cryptocurrency payment demands rather than a general closure, could genuinely have been anticipated at the time. The specific combination of IRGC enforcement, sanctions impossibility, and discriminatory access is a qualitatively different event from the general Hormuz closure risk that was visible in June 2025, and that distinction is worth developing carefully in any hardship argument.
What Does My Insurance Cover? The Coverage Issues Specific to the Toll
War risk insurance across the Gulf region has been significantly disrupted since early March 2026. Two coverage questions are specific to the toll scenario and will define the disputes that follow.
The Joint War Committee expanded its Listed Areas via JWLA-033, issued on 3 March 2026 and effective from 9 March 2026, to encompass the Arabian Gulf, Gulf of Oman, and wider Indian Ocean region. Every vessel entering that region now requires Additional War Risk Premiums. Cancellations issued by International Group P&I clubs in early March affected war risk extensions only, basic P&I mutual liability cover was not cancelled and remains in force. Hull war risk insurance remains available in the Lloyd's and company market at substantially elevated premiums; for a VLCC with a hull value of $100 million, the per-voyage Additional War Risk Premium at peak-crisis rates, reported by different market sources at between 1 and 10 percent of hull value depending on flag state, owner nationality, vessel trading history, and the specific point in the crisis timeline, has in the most exposed cases significantly exceeded the toll itself.
The first coverage question specific to the toll concerns the exclusion at Clause 4.1.6 of the Institute War and Strikes Clauses (Hulls, Time), which excludes losses arising from “failure to provide security or to pay any fine or penalty or any finance cause.” If a vessel is physically interdicted by IRGC naval forces following refusal to pay the toll, hull underwriters will invoke this exclusion, characterising the financial demand as the proximate cause and arguing that the assured's refusal to pay constitutes a failure to pay a finance cause within the meaning of the exclusion. The assured's counter-argument is that where a vessel is seized and compelled by military force by an IRGC vessel operating in an active armed conflict, the proximate cause of the loss is a war peril rather than a financial one. The exclusion was designed for routine commercial or judicial enforcement proceedings such as a regulatory fine, a court order, or a port authority charge, and was not intended to capture coerced military seizure by a designated terrorist organisation in a conflict zone. This argument is legally sound but untested in this specific context, and the outcome will turn on the individual facts of each case.
The second coverage question concerns Additional War Risk Premium allocation under CONWARTIME 2013 Clause (d), which entitles owners to recover additional war risk premiums from charterers. Given that premiums have increased by a factor of twenty or more from pre-crisis levels, this reimbursement obligation involves very significant sums per voyage. The revised CONWARTIME 2025 clause requires owners to produce evidence of actual additional premiums incurred and to credit any no-claims bonus reductions, a transparency and verification mechanism that will feature centrally in any AWRP reimbursement dispute.
The Toll in Practice: A Hypothetical Scenario from the Strait
The following scenario illustrates how the legal threads examined above interact in a single realistic set of facts. A single toll demand at the entrance to the Strait generates simultaneous disputes across sanctions law, charterparty obligations, cargo sale performance, insurance coverage, and UAE court jurisdiction. The scenario is hypothetical, but each legal thread is grounded in the analysis above and in Part 1 of this series.
A vessel flagged in the Marshall Islands and owned by Atlas Maritime Ltd, a Greek company with a London management office, is fully laden with cargo loaded at a UAE port with a value of approximately $158 million. The vessel is at anchor inside the Arabian Gulf awaiting IRGC clearance to transit the Strait of Hormuz and proceed to Asia. Without that clearance, it cannot exit the Arabian Gulf. The vessel is on time charter to Meridian Energy Trading B.V. under an NYPE 2015 form governed by English law with London arbitration. The cargo has been sold by Meridian to Sunrise Energy Japan K.K. under a CIF contract governed by English law, with downstream supply obligations tied to delivery at Yokohama.
a) The sanctions dilemma
At 07:00 local time, an IRGC patrol vessel broadcasts on VHF Channel 16 a demand for approximately $1 to $2 million in Bitcoin to a designated wallet address as a condition of clearance, warning that non-compliant vessels will be refused passage and may face physical interdiction.
Iran’s access regime requires submission of vessel and cargo information to IRGC-connected intermediaries before a clearance code is issued. The vessel falls within this regime. Submission of cargo and crew data may itself constitute engagement with a designated Foreign Terrorist Organisation, depending on the nature of the interaction.
Atlas’s legal team identifies that authorising payment would engage US, EU, and UK sanctions frameworks. Payment is therefore not authorised. Meridian faces the same constraint. Although the toll would prima facie fall for charterers’ account under NYPE 2015 Clause 7, Meridian cannot lawfully authorise payment. No regulatory guidance is obtained within the required timeframe. Both parties are left without a legally viable payment option.
b) The charterparty dispute
With no payment authorised, Atlas invokes CONWARTIME 2013 and refuses to proceed. It notifies Meridian that the Strait constitutes a war risk area, citing the presence of IRGC vessels, the risk of interdiction, and recent attacks on non-compliant vessels. Atlas proposes diversion to a UAE anchorage.
Meridian disputes this, arguing that a toll demand alone does not constitute a war risk, that Atlas is in breach of its obligation to prosecute the voyage with utmost despatch, and that the vessel is off-hire. Atlas responds that the combination of military enforcement, sanctions constraints, and risk to crew satisfies the contractual threshold for refusal.
c) The cargo dispute
Atlas's decision to divert to a UAE port anchorage immediately engages Meridian's CIF obligations to Sunrise. With the Strait inaccessible and no alternative maritime route available, the vessel is immobilised at the anchorage with no clear path to completing the voyage. Sunrise declares Meridian in breach and demands either performance or damages. Meridian argues force majeure under the sale contract. Under standard CIF terms, however, increased cost and route deviation do not ordinarily discharge the delivery obligation, and the sale contract contains no bespoke force majeure clause addressing tolled waterways or sanctions-related payment impossibilities. Meridian is therefore placed in a position where the toll it legally cannot pay is simultaneously making its CIF delivery obligations impossible to perform without criminal exposure, yet the general position under standard trade terms is that this combination does not discharge performance.
Had the sale contract been governed by UAE law, Meridian would have had a materially stronger argument. Under Article 249 of the UAE Civil Code, the cumulative burden of the toll (approximately $1 to $2 million), the Additional War Risk Premium for any compliant transit, which at peak-crisis rates could amount to several million dollars depending on the vessel's specific insurance terms, the costs of vessel immobilisation at the anchorage, and the cargo delay damages would collectively represent an exceptional and unforeseeable onerousness threatening grave loss. A UAE court could rebalance Meridian's obligations to Sunrise, potentially by extending the delivery period, adjusting the freight component of the CIF price, or apportioning the additional costs between the parties, without any showing of full impossibility. This demonstrates why governing law selection in Gulf-related commodity contracts has become a strategic decision rather than a boilerplate exercise.
d) The insurance dispute
With the vessel at the anchorage, Atlas's hull war risk underwriter is notified of the interdiction threat and the diversion. The underwriter raises Clause 4.1.6, noting that the IRGC demand was financial in nature and that Atlas's decision not to pay constitutes a "failure to pay a finance cause" within the exclusion. Atlas counters that Clause 4.1.6 was designed for routine commercial or judicial proceedings such as a regulatory fine or court order, not military interdiction by an FTO-designated organisation in an active conflict zone, and that the proximate cause of any seizure scenario would be the IRGC's act of war rather than Atlas's refusal to make an unlawful payment. The underwriter reserves its position pending further investigation. Separately, Atlas seeks to recover the Additional War Risk Premium for the diverted voyage from Meridian under CONWARTIME 2013 Clause (d). Meridian disputes this, arguing that the diversion was unauthorised and that the AWRP relates to a deviation it did not instruct. Both coverage disputes remain unresolved as the vessel remains at anchorage.
e) The UAE court dimension
With the vessel physically present at the anchorage and the cargo dispute between Meridian and Sunrise unresolved, Sunrise's UAE counsel identifies that the vessel is within UAE territorial jurisdiction and that the cargo claim, for delayed delivery of $158 million of cargo under a CIF contract, constitutes a maritime claim under Article 53 of Federal Decree-Law No. 43 of 2023 on Maritime Law. Sunrise files an urgent application before the competent UAE court seeking arrest of the vessel under Article 54 of the Maritime Law as security for its claim against Meridian, on the basis that the cargo claim constitutes a maritime debt capable of grounding an arrest, notwithstanding that the underlying liability rests with the charterer. The arrest application presents Atlas with a further complication. Although the underlying CIF dispute runs between Meridian and Sunrise rather than directly against Atlas, the vessel is the asset being offered as security, and an arrest order would prevent Atlas from redeploying it. Atlas must decide whether to provide counter-security to release the vessel or to contest the arrest, both paths involve UAE court proceedings and add further cost and delay to a vessel already immobilised since the IRGC's initial toll demand at the entrance to the Strait.
What the scenario illustrates. From a single IRGC toll demand, a chain of events has generated a sanctions compliance crisis for two companies across three jurisdictions, a charterparty performance dispute with an off-hire threat running at tens of thousands of dollars per day, a CIF cargo delay claim for $158 million, two unresolved insurance coverage disputes, and a UAE court arrest application. None of these disputes has a clean resolution under the existing contractual and legal framework. Each was foreseeable, and each could have been at least partially addressed through properly drafted contractual provisions, had the toll scenario been anticipated when the fixture and sale contract were negotiated.
A toll demand does not leave the situation static; it immediately triggers a chain of operational and legal consequences. Clearance is refused, the vessel cannot proceed, and delay begins to affect the entire contractual chain, including laycan windows, discharge schedules, and downstream obligations. Charterparty positions diverge as owners consider war risk refusal and charterers assess exposure to delay. Sanctions issues escalate across jurisdictions, cargo claims begin to crystallise under CIF structures, and insurers are notified and start positioning on coverage. Where the vessel remains within UAE jurisdiction, the risk of arrest arises. Within a short period, a single demand develops into parallel disputes across multiple fronts.
Recommended Steps for Affected Parties
The scenario above demonstrates that preparation, documentation discipline, and governing law awareness are as important as the substantive legal analysis. The following steps are organised in order of priority.
1. Sanctions compliance, the immediate priority
The sanctions steps, including documentation submission risk, contemporaneous record-keeping, multi-jurisdictional sanctions advice, and any applicable OFAC general licence compliance, are set out in full in the Recommended Steps for Affected Parties section of Part 1 of this series and are not repeated here. Those steps should be completed before any transit decision is made.
2. Charterparty and contract review
- For existing time charters, review Clause 7 language to confirm toll allocation to charterers and assess whether the current circumstances, IRGC enforcement, discrimination against vessels of certain flags and ownership, and physical interdiction risk, independently trigger owners' right to refuse orders under CONWARTIME or VOYWAR, setting out the factual basis for that position in writing to the charterer at the time the decision is made.
- For existing voyage charters, assess owners' unrecovered exposure under the voyage charter arrangements and consider whether an extraordinary charges or deviation-related claim can be advanced under the specific language of the fixture.
- For contracts governed by UAE law, prepare an Article 249 cumulative cost analysis before any dispute is filed. The threshold analysis requires evidence of all additional costs and losses attributable to the toll and associated disruption assessed together as a single picture, and that evidence must be gathered from the moment of the first IRGC demand rather than reconstructed after proceedings are commenced.
- For new fixtures, include bespoke rider clauses addressing Hormuz toll liability allocation and any agreed cap; Additional War Risk Premium reimbursement referencing Joint War Committee Listed Areas with a specified sharing arrangement; express provisions addressing vessel immobilisation and waiting time if the Strait is inaccessible, including cost allocation between owners and charterers; sanctions compliance warranties from both parties; and ceasefire contingency provisions specifying what happens if the Strait reopens under Iranian-administered conditions.
- For new sale contracts, include express provisions addressing transit toll allocation, route disruption costs, and the interaction between the Incoterms trade term and extraordinary transit charges, particularly the sanctions impossibility gap that Incoterms 2020 does not address.
- Before invoking force majeure, assess whether a variation or change-order route offers stronger relief. Where a counterparty has directed alternative supply arrangements, accepted modified delivery terms, required waiting arrangements pending resolution of the transit issue, or acquiesced in a materially different method of performance, the resulting disruption may fit more naturally under a variation or price adjustment mechanism than under force majeure. This distinction is commercially significant. Force majeure typically provides time relief or temporary suspension without cost recovery, while a variation or change-order claim supports both time and money. A party that can demonstrate its counterparty required or accepted a changed performance method, rather than simply tolerating the disruption, may recover additional costs it would not recover under a force majeure framing alone. This analysis is particularly relevant to parties to EPC contracts, long-term supply agreements, and infrastructure contracts with price adjustment or compensation event provisions, where the toll and its downstream consequences may fall into a compensable category rather than a relief-only category.
3. Insurance confirmation before any transit
- Confirm hull war risk cover is in place under JWLA-033 before any planned transit. Do not assume prior cover remains adequate following the Listed Areas expansion.
- Arrange cargo war risk cover separately and confirm it extends to the Gulf region. Do not assume it is bundled into hull cover.
- Obtain written hull counsel advice on the Clause 4.1.6 position before any transit in which physical interdiction for toll refusal is a realistic risk. Prepare the causation argument, that the proximate cause is a war peril, not a financial one, in advance, not after an interdiction event.
- Notify your P&I club, flag state, and classification society before any planned transit and confirm the vessel's position under IBF High Risk Area designations, including crew bonus entitlements and repatriation rights.
4. Dispute preparedness
- Preserve all communications, voyage records, IRGC interaction logs, cost documentation, and insurance notices from the date of the first clearance demand. These records underpin every category of claim that follows, including demurrage, off-hire, deviation costs, AWRP reimbursement, force majeure, and sanctions-related termination.
- If a vessel is at anchor in UAE territorial waters and a cargo or charterparty dispute is unresolved, assess vessel arrest exposure proactively. Under Articles 53 and 54 of Federal Decree-Law No. 43 of 2023 on Maritime Law, maritime creditors may apply for arrest of a vessel as security for any recognised maritime debt. A vessel at anchor in UAE territorial waters is within UAE jurisdiction, and arrest applications in these circumstances can be filed and heard on an urgent basis. Shipowners should consider whether to offer voluntary security proactively to avoid the operational disruption of an arrest order.
- For UAE-law-governed contracts, ensure the Article 249 cumulative analysis assembled under step 2(c) forms part of the pre-litigation strategy review from the outset. The analysis earlier in this article makes clear that this doctrine offers relief that standard trade term governing laws may not provide, and that advantage is lost entirely if the party seeking relief fails to preserve and present the evidence required to establish it.
Conclusion
The legal position is settled. No state may toll a natural international strait, and Iran's toll is illegal under established international law principles, including the customary law regime Iran itself invokes. The enforcement position is not settled, as reflected in the Security Council veto on 7 April 2026, and multilateral enforcement remains unavailable in the near term.
The practical consequence, illustrated by the scenario above, is that protection must come through contract, insurance, and compliance rather than through international institutions. Standard charterparty forms, Incoterms 2020, and existing war risk clauses were not drafted with this specific combination of circumstances in mind. This is a toll backed by military coercion that is simultaneously illegal under international law and unsatisfiable under sanctions law, imposed on one of the world’s most commercially significant maritime passages. That legal gap falls on practitioners to close through bespoke drafting, careful governing law selection, and rigorous sanctions compliance discipline.
The precedent risk is equally significant. If Iran's toll is effectively accepted in practice through payment by commercially pressured operators who calculate that $1 to $2 million is cheaper than the commercial and legal consequences of refusal, it creates a template for every major maritime chokepoint worldwide. The risk that analogous regimes could be imposed at other strategically significant waterways represents a material long-term threat to freedom of navigation as a principle of customary international law.
Hadef & Partners advises shipowners, commodity traders, and cargo interests across the Gulf region and internationally on maritime disputes, sanctions compliance, and the full range of commercial consequences arising from the Strait of Hormuz crisis.
If you would like further information relating to this ongoing situation, and how it may be affecting your business, please contact Mohamed Eissa at m.eissa@hadefpartners.com or your usual Hadef & Partners contact.
This article is intended for general informational purposes only and does not constitute legal advice. Readers should seek independent legal counsel in relation to their specific circumstances.