The Hormuz Effect: War, Sanctions and the Convergence of Risks in Energy Arbitration

[Garima Dhankhar holds an LL.M. in International Arbitration and Dispute Resolution from the National University of Singapore. She currently works with Justice Indu Malhotra, former Judge of the Supreme Court of India and a Member of the Permanent Court of Arbitration, assisting in international arbitrations.]

The past few years have demonstrated, with increasing clarity, that geopolitical conflicts are no longer peripheral to the functioning of international energy markets. They have become a primary determinant of how long-term energy contracts are performed, how disputes arise under them, and the legal frameworks within which those disputes are ultimately resolved.

The Russia–Ukraine conflict offered the international arbitration community a sobering preview of this reality. Sanctions-driven constraints on performance generated a substantial wave of contractual claims, while enforcement of awards against Russian state entities was complicated by asset freezes and domestic court intervention, and the legality of continued performance became a live issue in arbitral proceedings. More fundamentally, the conflict raised a question going to the limits of arbitration itself i.e. whether awards arising from sanctions-affected contracts can withstand the threshold of EU public policy review. This issue is pending before the Court of Justice of the European Union in Reibel v Stankoimport, where the Advocate General’s February 2026 Opinion confirmed arbitrability in principle while indicating that EU sanctions may constrain the enforcement of resulting awards on public policy grounds. 

The fact that questions of this nature remain unresolved, despite several years of sanctions-driven disputes, reflects a deeper instability in the framework within which energy arbitration operates – an instability that the  recent developments in the Gulf are likely to intensify further. 

Strikes on Qatar’s Ras Laffan industrial city, the world’s largest LNG production and export facility, and on Iran’s South Pars gas processing complex have caused damage that will take years to repair. The Strait of Hormuz, through which approximately 27 percent of the world’s seaborne oil trade and 20 percent of global LNG transits, has been effectively restricted, collapsing fertiliser supply chains, driving war risk insurance premiums to historic highs, and producing energy price dislocations that have been described as the biggest energy security crisis in history. Unlike Russia–Ukraine, which disrupted energy markets through regulatory and financial constraint, the Gulf conflict has struck directly at the physical infrastructure and logistical arteries of energy supply, altering the conditions in which contractual performance itself becomes possible and amplifying the legal challenges of the earlier conflict by placing performance, legality, and enforcement under simultaneous strain.

What makes this particularly consequential for energy arbitration is not any single development, but the concurrent emergence of these challenges, each bearing upon the others, and presenting tribunals, contracting parties, and practitioners with challenges likely to define the sector for years to come. This post examines these in two parts: first, the force majeure disputes already taking shape and the doctrinal difficulties they present; and second, the compounding effect of sanctions on contractual defences, arbitral proceedings, and the practical enforceability of awards. It concludes with observations on the implications for contracting practice and dispute resolution going forward.

Force Majeure: Familiar Doctrine Under Unfamiliar Pressure

The present conflict has already generated disputes through force majeure declarations by major energy producers. QatarEnergy has declared force majeure on LNG contracts with counterparties in Italy, Belgium, South Korea, and China, and has extended that declaration through mid-June 2026 due to ongoing Hormuz hostilities. The legal validity of these declarations, and the consequences that follow from them under the governing supply agreements, turn on doctrine that is well settled in principle but difficult to apply in the present factual context. 

Under English or New York law, which governs the vast majority of international LNG sale and purchase agreements, force majeure is a creature of contract. In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm), the English Commercial Court clarified that, where concurrent causes of non-performance exist, force majeure relief depends on the qualifying event being the effective cause for non-performance, and on the invoking party’s compliance with its mitigation obligations.

Both these requirements are likely to be contested in proceedings arising from the Gulf declarations. On foreseeability, the Twelve-Day War between Israel and Iran in June 2025 involved widely reported strikes on Gulf energy facilities. For agreements concluded after that date, counterparties may argue military engagement was a foreseeable risk and that a clause not expressly addressing such events was not engaged. On causation and mitigation, where alternative supply sources or routes existed and were not activated, counterparties may contend non-performance was attributable to the invoking party’s own commercial choices. Establishing a direct causal link between the conflict and the inability to perform, as distinct from mere cost escalation, is likely to be the central evidentiary burden in any force majeure claim arising from this disruption.

Most disputes are unlikely to concern total non-performance. A partial Hormuz restriction or temporary Ras Laffan outage does not sit cleanly within the binary logic of force majeure defence, and are more likely to generate contested claims concerning cargo nominations, delivery schedules, and the scope of partial relief. For contracts governed by civil law systems, or as persuasive comparative guidance in common law proceedings, the UNIDROIT Principles of International Commercial Contracts draw a meaningful distinction between force majeure (Article 7.1.7) and hardship (Article 6.2.1), with hardship providing a renegotiation pathway where performance becomes excessively onerous, and many Gulf-affected contracts may fall closer to that threshold than to total excuse. This threshold for total excuse has consistently been set high. In Tsakiroglou and Co Ltd v Noblee Thorl GmbH [1962] AC 93, the House of Lords held that Suez Canal closure did not frustrate a shipment contract because alternative routing, though costlier, remained available.

The risk of strategic invocation is a further dimension tribunals may need to confront. Parties locked into long-term contracts at pre-disruption pricing face a material commercial incentive to invoke force majeure where any plausible trigger exists. The Russia–Ukraine context offered a clear illustration, with Gazprom’s July 2022 force majeure declarations on European gas supplies  widely characterised as commercially rather than operationally driven. The Gulf conflict, in combining genuine physical disruption with significant energy price volatility, may create conditions in which the distinction between bona fide force majeure and strategic invocation becomes difficult to establish. In such cases, tribunals are likely to apply the Seadrill framework with close attention to assess whether the force majeure event was the operative cause of non-performance or a pretext for a commercially motivated exit.

Compounding Challenges: Sanctions, Illegality, and Enforcement

The challenges identified in the context of force majeure do not arise in isolation. The same underlying events that have prompted Force Majeure declarations have also intensified sanctions constraints, placing questions of performance, legality, and enforcement under simultaneous strain. Where an Iranian state entity is party to a supply agreement, or where payment flows through a designated financial institution, continued performance may expose counterparties to US sanctions risk where the transaction carries sufficient US nexus, notwithstanding the governing law of the contract. When sanctions interact with contractual obligations in this way, force majeure, illegality, and termination rights may be engaged concurrently, leaving uncertainty as to the governing legal framework. 

The enforcement dimension presents a challenge that is, if anything, more structurally embedded. Although Iran is a party to the New York Convention, US sanctions freeze Iranian state assets in Western jurisdictions, and courts of sanctions-enforcing states may decline recognition on public policy grounds under Article V, where enforcement would require transactions prohibited under the applicable sanctions regime. Formal treaty entitlement and practical enforceability may thus be structurally decoupled, as a direct consequence of the same conflict that generated the underlying dispute. 

The Singapore High Court’s decision in DRL v DRK [2026] SGHC 32 illustrates this further, where a SIAC arbitration was terminated because sanctions rendered its continuation impossible, demonstrating that sanctions exposure may prevent proceedings from reaching a conclusion at all. The choice of seat must therefore now incorporate analysis of whether the administering institution and its officials are exposed to sanctions licensing risk in the conduct of the proceedings themselves.

Forward Implications

The 2026 Gulf crisis has not introduced entirely new legal problems. Force majeure, sanctions illegality, and enforcement have each been tested in earlier conflicts. What the current crisis has done is place them under concurrent pressure within a single dispute context, and in a configuration that existing frameworks were not designed to address in combination. The challenges highlighted in this post are likely to have enduring implications for dispute resolution in the energy sector. Damaged infrastructure will take years to rebuild, and the resulting supply chain reorientation is likely to sustain a pipeline of disputes extending well into the next decade. This trajectory calls for a recalibration of contractual drafting, arbitral practice, and adjudicatory approach.

For contracting parties, force majeure clauses that rely on generic formulations such as “acts of God” or “events beyond reasonable control” are unlikely to provide adequate or predictable protection in the environment this conflict has revealed. Clauses should expressly address armed conflict affecting energy infrastructure and maritime transit routes, and treat the interplay between physical disruption and sanctions as an integrated risk rather than separate contingencies. 

For practitioners advising on arbitration agreements, traditional seat selection criteria such as institutional neutrality, enforceability of awards, and receptiveness of local courts, while still relevant, are no longer sufficient. Where contracts engage Iran-related sanctions risk, a parallel analysis is required to assess whether the institution’s home jurisdiction imposes licensing obligations for transactions involving designated parties, whether tribunal members’ nationalities or affiliations trigger authorisation requirements, and whether the seat’s courts may complicate enforcement pending sanctions determinations. This analysis must be undertaken at the drafting stage, not as a contingency once a dispute has arisen.

For arbitral tribunals, the difficulty lies where physical disruption and legal prohibition arise from the same event. The tribunal’s task is not merely to determine whether performance was excused, but to assess how these concurrent grounds interact and whether one displaces or reinforces the other. This demands a more structured approach to causation and attribution than existing case law provides.

Photo attribution: Photo by Abolhassan Neghabi on Unsplash