The impact of the Iran war on cargo and logistics

As the conflict escalates, we have seen a container ship reportedly hit by a projectile, presumably a missile or drone. We have also seen MSC issue notices to cargo owners that they are terminating voyages. What are the implications of this escalating conflict on the cargo and logistics industry?

There is an estimated 135,000 TEU in transit in the region with an estimated cargo value of nearly US$4 billion. The exposure to cargo insurers and the owners of the cargo is significant. Commercial shipping is being advised to avoid the region and seek alternative routes. Where this is not possible, it appears that carriers are looking to terminate voyages and demanding that cargo owners either pay increased charges or find alternative methods of transportation.

This will inevitably lead to higher costs. Carriers are already facing the spike in oil prices which they will seek to pass on to cargo owners. If the carriers are able to obtain insurance to transit through the region, this will add yet further cost. With increased freight rates and substantial delays as cargo is discharged and rerouted this will have a considerable impact on supply chains.

Cargo owners are likely to question whether onforwarding costs can be recovered under their policies. Whilst ICC(A) includes some cover (clause 12) for forwarding charges, this applies where those charges arise “as a result of the operation of a risk covered by this insurance”. Where war is excluded (clause 6) that cover may not be triggered and there will be difficult questions to consider about causation.

Such actions by carriers are also likely to give rise to substantial delays in the carriage, again an excluded peril (see clause 4.5). Where there is a risk of cargo being lost during transit due to such actions, the distinction between delay and constructive total loss can be a difficult one to draw.

Cargo owners may seek to buy additional war cover and potentially strikes and terrorism cover. As the conflict escalates and various regional organisations get drawn in (many of which have been designated terrorist organisations by some States) it will become increasingly difficult to say whether a loss is caused through war or through terrorism. Moreover, if cargo is left unattended at ports following discharge from vessels, it will be at a substantially increased risk of theft and damage. If cargo owners obtain ‘buy-back’ cover from different insurers, there is a growing risk of disputes as to which policy responds to events which may be very poorly recorded and documented.

The situation causes considerable issues for the forwarding industry. Freight forwarders will be receiving many notices of voyage cancellation and surcharges from the ocean lines. These can be very difficult to pass on to customers from a commercial perspective and where forwarders have long-term contracts with customers, they may struggle to pass them on contractually.

Forwarders will need to carefully consider their contractual position with the shipping lines and with their customers. Many of these lines issued similar notices during the outbreak of hostilities between Russia and Ukraine. Whilst most bills of lading include Force Majeure provisions and clauses granting the carrier liberties in the event of hindrances and restrictions, courts will interpret such clauses strictly and restrictively. Courts will also likely bear in mind the carrier’s ongoing obligation to carefully care for the cargo whilst in the carrier’s custody and care. Forwarders will also need to ensure that any notices which they pass on to their customers are strictly in accordance with their contractual rights and obligations.