[PODCAST] Strait Of Hormuz Energy Disputes: Using Mediation And Arbitration To Navigate Force Majeure And Contract Risk

In this episode of the JAMS podcast, JAMS neutrals Hon. Karen Brown Willcutts (Former), FCIArb, Hugh E. Hackney, Esq., and Zela "Zee" G. Claiborne, Esq. examine the commercial and contractual fallout of disruptions to global energy transportation and how mediation and arbitration can keep energy moving while the larger disputes are resolved. Drawing on decades on the trial bench and in oil and gas arbitrations conducted globally, they explain why force majeure clauses, marine insurance, and the sheer number of parties at the table shape what is possible once a shipping route closes.

The neutrals explain that these disputes rarely turn on a single contract term. A fully loaded tanker carries $240 to $330 million in cargo and hull value, so insurers, reinsurers, and in many cases a sovereign party all have a say in whether performance continues and who absorbs the cost of a longer route. They offer practical insight into what a mediator can realistically accomplish early, how parties can set the hardest questions aside and keep deliveries moving in the meantime, and why preserving a long-standing commercial relationship often matters more than winning the first argument. Throughout the conversation, they examine:

• Why the force majeure clause is the first provision tested when a route closes, and how these agreements, many of them decades old, can be drafted to suspend obligations, limit exposure to damages and termination, and protect the relationships behind the contract
• How mediation can narrow a multiparty dispute before it reaches arbitration, including temporary arrangements that keep product flowing and tolling-style agreements that defer the cost allocation question to a tribunal
• What changes when insurers, reinsurers, and sovereign parties join the mediation, from the reluctance of any party to move first to the emergency relief provisions available in most international arbitration rules

This episode provides practical guidance for in-house and outside counsel, claims professionals, insurers, and risk leaders managing energy contracts through an external shock, emphasizing proactive planning, early information gathering, and the flexibility to preserve both the deal and the relationship.

JAMS ADR · Strait of Hormuz Energy Disputes: Using Mediation and Arbitration to Navigate Force Majeure and Contract Risk

Moderator [00:00:00]: Welcome to this podcast from JAMS. In this episode, we're discussing the significant business and contractual challenges stemming from disruptions to global energy transportation. The turmoil in the Strait of Hormuz is affecting how energy moves across borders and placing pressure on existing commercial relationships. We're going to break down the practical, legal, and business issues that arise when established transportation routes and performance arrangements are disrupted, and how ADR can help parties navigate those challenges. Joining us are three distinguished JAMS neutrals: Judge Karen Willcutts, who has over 35 years of experience as a trial lawyer, judge, mediator, and arbitrator; Hugh Hackney, a seasoned mediator and arbitrator with deep experience in oil and gas arbitrations domestically and in numerous countries across Europe, Asia, Latin America, and the Middle East; and Zee Claiborne, a neutral for decades, specializing in complex domestic and international business disputes involving construction, energy, and commercial contracts. So Judge Willcutts, Hugh, Zee, welcome to the podcast.

Judge Karen Brown Willcutts [00:01:13]: Thank you.

Hugh Hackney [00:01:14]: Thank you. Glad to be here.

Zee Claiborne [00:01:15]: Thank you.

Moderator [00:01:17]: Hugh, when a disruption of the scale that we're seeing in the Strait of Hormuz reaches an energy transaction, where do the first serious contractual commercial disagreements tend to emerge?

Hugh Hackney [00:01:31]: I think that you have to look at marine insurance and insurance of tankers, because a fully loaded tanker is worth $240 to $330 million. That's the cargo plus the value of the tanker. And if, in fact, they were to be sunk or damaged, then that's a huge financial loss. And the first thing that happens is the insurers say, "We're not going to cover the loss if you continue to ship through the strait."

Moderator [00:02:07]: I want to bring in Zee to talk a little bit about, I know you've seen some of these energy disruptions before.Tell us a little bit about your experience, Zee.

Zee Claiborne [00:02:16]: As I was thinking about the problem we're discussing today, I was recalling some mediations that I had during the pandemic, another time when there were supply chain delays. So specifically, something like solar equipment was supposed to be delivered from Asia and was overdue, and maybe not ever going to arrive.So, what could the parties do in an instance like that? And so, during the mediation, we were looking at things like the contract terms, of course, and the insurance policies that were available. We were discussing the issue of force majeure, which really was a very central issue here, where one side was saying it wasn't applicable, the force majeure provision was not applicable, and the other side was saying, "Oh, yes, it was."And there were questions about things like, are we going to continue with performance? And how are we going to deal with extra costs? And all of those are really things that mediators can discuss with the parties in a very constructive way.

Moderator [00:03:23]: I want to dive into that issue of performance that you just mentioned, Zee. Let's bring in a real concrete example to see how this plays out. Let's say a producer has an existing delivery obligation, but disruption to its normal shipping route means that's no longer going to happen. So this invokes force majeure, as you just alluded to, Zee. The buyer maintains that another means of performance is available and expects that contract to be honored. What happens next? What could the parties realistically accomplish through mediation before deciding legal responsibility? Judge Willcutts, do you want to jump in on that one?

Judge Karen Brown Willcutts [00:04:09]: Sure. I think one obvious option is probably go to the force majeure clause and see what it says and what can be done. It's a contractual issue, and hopefully there is a situation where the parties can agree to hold off really filing a lawsuit, and maybe agree, like you would in a statute of limitations issue, just to toll some of the legal issues for the moment and try to get the parties together to look into what can be done. The issues are complicated, and many players are involved, including, as was mentioned, the insurance company, and whether there's a sovereign involved that has a lot of sway on what's going to happen. So, there's not a lot of quick fixes, but I think some of those that I just mentioned could be helpful.

Moderator [00:05:17]: Zee, Judge Willcutts mentioned “tolling”. Is that pretty typical? Can you call time out and come to an agreement that these issues are tolled and that we can then come up with a mechanism for dispute resolution?

Zee Claiborne [00:05:33]: Sure. I think that's a possibility. I don't mean that there's legally tolling applying here, but during the course of a mediation, surely the parties could put certain issues to the side knowing that they'll be determined later, maybe through an arbitration, and agree to go forward to try to figure out a plan for what they could do now to continue with performance. Because if one party stops performing, that has pretty serious consequences under the law, as you know.

Moderator [00:06:06]: Hugh, have you seen these issues played out? What's been your experience? What are the sticking points?

Hugh Hackney [00:06:10]: I think the first thing that's a sticking point is the delay that one party wants and the other one doesn't.It's very typical that one side is going to say, "We just can't do anything at this point because we've got a force majeure clause, we've got insurance issues, and we've got huge increases in cost to get you the product; therefore, we're not going to be able to deliver." And some of those contracts are with sovereigns; some of them are company-to-company.The main issue, though, is always going to be, okay, I think as a mediator, you can resolve some of the issues, like the contract controls, but what are the sticking points in the contract? And try and get as many of those resolved before you get to arbitration. I think you narrow the process. I've seen that happen a number of times in cases like this where you have blowouts in an oil field. The big issue is going to be who has to pay always and how much. 

Moderator [00:07:13]: So you're saying mediation can help narrow the issues that ultimately will have to be decided in arbitration? 

Hugh Hackney [00:07:22]: Yes, I do. I think that's the best and most positive use of mediation early.

Moderator [00:07:27]: In our hypothetical, let's say this shipment can still move, but only through a longer or more complicated route that will entail additional transportation expenses, higher insurance costs. So the commercial parties, there's a disagreement over who's going to absorb that cost, which is going to further delay and create additional losses. Zee, in terms of the mediation, how can that mediation help the transaction continue when the parties cannot agree on who should absorb the additional costs?

Zee Claiborne [00:08:00]: It seems to me unlikely that the parties are going to agree during a mediation on who will absorb the additional cost, and it seems that that's something that could be put over to handle during an arbitration later on. But during mediation, what the parties could do, which is very productive, is agree on some sort of temporary arrangement so that the process can go forward, the deliveries can go forward, and the issues can be resolved later. And it seems to me that one of the best things about mediation is that it's possible during a mediation to preserve the relationship of the parties. These parties are business partners. They've been working together on a big deal, and so the last thing we want to have happen is to have one of the parties go off in a huff and say, "I'm going to stop trying to deliver," or on the other side, "I'm going to stop trying to pay." I think we can work that through during the course of the mediation so they can continue to productively work together even though they disagree about some things.

Moderator [00:09:14]: Hugh, you mentioned the insurance carriers. How does their presence impact a mediation when those folks have to be at the table?

Hugh Hackney [00:09:24]: You're going to have a much more complicated mediation, because you're going to have at least three parties, and if you have reinsurance involved, you're going to have a fourth party. And if you have a sovereign involved, you may have a fifth party. You're going to have to basically try and get them all in the same room, which may be very difficult, even using technology. And the other thing that's going to happen is everybody's going to look at everybody and go, "I'm not going to settle first." And you just have to come up with some issues that they can agree on and go forward from there, because initially it's going to be one of those deals where, okay, who draws first? And nothing will happen. And I've experienced that in international arbitration involving oil and gas cases.

Moderator [00:10:19]: Explain what you mean there, like who goes first, nothing will happen.What's the dynamic there?

Hugh Hackney [00:10:26]: They don't want to, number one, appear to be weak. And number two, they don't want to give up anything financially. And at the end of the day, as I said earlier, this is all about how much money's going to be moving back and forth across the table.

Moderator [00:10:42]: Judge Willcutts, have you seen that in a mediation where the parties are scared to show any kind of compromise, and that kind of stymies the issues? And how do you get around that?

Judge Karen Brown Willcutts [00:10:53]: I would say it's typical. It's typical in mediations, especially high-stakes mediations where all the parties are very sophisticated, and they know their contracts, and they are not going to easily say, "I'll give up on this." But I do think, I think we maybe said this more than once now, but in these kinds of cases, this many players, and it's an emergency in some ways for them, for a lot of them anyway, and the best thing I think that we can do is to, again, hone in on things that could be agreed upon, even if it's saying, "Okay, we know the contract says this," and one party says, "No, you're interpreting it wrong. That's not what it means," that they could say, "Okay, let's just agree to a temporary resolution and agree that this will go for a certain period of time, just to keep the ball rolling and keep the energy flowing, and we'll come back to that later." That's, I think, a definite possibility.

Moderator [00:12:15]: And I suppose that helps maintain the commercial relationship that we've been talking about. But Zee, tell me a little bit about how the process works where you get maybe some wins in terms of compromises on some side issues, but you leave the big dispute for a binding decision. What tells the parties that they've reached that point, and how do you get there?

Zee Claiborne [00:12:41]: That's difficult. It's a difficult call, yeah. It just happens during the course of the mediation, but all the parties have some interest in having the deal go through in some way, so they can reach some sort of temporary agreement and keep the general damages down as much as possible. But I think what Hugh was saying earlier is really correct: if you have the insurance people in there, plus the parties, plus anybody else who's involved, it would be very difficult to actually resolve a lot of those big issues at the time of mediation. It's more a matter of, let's keep the commercial relationship of the main parties intact as much as possible, and let's keep the work, the distribution, moving; the supply chain delays, work past them in some way; and solve the other issues finally later. And I think an arbitration tribunal would probably be the answer to that.

Judge Karen Brown Willcutts [00:13:52]: I would add to that, in many cases, their contracts may require arbitration anyway, but you can always, and it's wise to do so, I think, in these situations especially, as we've been saying, make the concessions or agreements that you can to keep the ball rolling in terms of the production. But then, when you get to arbitration, the beauty about arbitration is, and mediation actually, is if the parties agree to changes in the contracts, that's something that they can get in mediation especially, that they could never get in court. Mediation is still very helpful in that regard, and that's something that most of us, I think, probably emphasize to the parties, is that, look, you can agree to change the contract. That's not going to happen very quickly is the problem in most cases. I've had several oil and gas mediations where it took two, three, or four sessions, because basically what the parties were doing was rewriting some of their contracts. Some of these contracts are very old and can be confusing. That's a long-term solution that has worked well in a lot of the oil and gas mediations that I've done. But they can take many meetings, and it's a situation where I get the lawyers all together in one room, and we just brainstorm about what we can do. And if you can get parties to agree to sit down like that together and brainstorm, it's very helpful.

Zee Claiborne [00:15:46]: I just wanted to add, Karen, I think you made a really good point, too, about the arbitration provisions, because it's very likely that these parties will have arbitration provisions in their contracts and so that is also something that would be discussed in the course of a long mediation, so that all of the parties can be thinking ahead about how this is going to work out. Make a long-term sort of strategic plan rather than just sticking to one point of view.

Moderator [00:16:20]: Hugh, what do these contracts have to say about neutrals who decide the arbitration?

Hugh Hackney [00:16:24]: To answer your question, I think you have to preface it by taking into consideration the fact that most of these contracts are very complicated. Some of the best legal minds, both domestically and internationally, have drafted them. Right now, I can assure you, in rooms all over the world, people are sitting down and going through various scenarios of how we're going to deal with what's going on, particularly right now in the Middle East. And some of those people probably have four to five different scenarios that they're willing to consider. This is very, very complicated. Many of these contracts have party-appointed neutrals. Most of them call for at least three arbitrators. Many of these contracts are very, very detailed, and some of them are ambiguous, particularly some of the older ones. And nobody changed them for whatever reason, because they were getting along and the oil was flowing. So I think that in order to really get to the table with anything, you just have to pick your victories and try and get as many of them as you can.

Zee Claiborne [00:17:45]: I wanted to say, though, in terms of... I agree with what you just said, Hugh. When we're thinking about international arbitration here, one thing that the parties might keep in mind is the provision for emergency relief, which is in most international arbitration rules. In JAMS, we have it in Article 3, Section 3.3, where one party, if they want to have an emergency arbitrator, would have to show that immediate loss or damage will result if they don't get emergency relief. And so maybe they want to put some contract issue in front of an emergency arbitrator, or maybe something about force majeure.

Moderator [00:18:29]: We've looked at what parties may be able to resolve commercially and what will require mediation or arbitration. But I want to close with some practical steps for counsel or executives or risk leaders when the disruption begins affecting an existing transaction. So I'll ask all three of you to answer this question. If you could give those folks a piece of advice, when we have this sort of external shock to the energy system, and it affects their contractual relationships, what's one piece of advice you would share with them? Judge Willcutts, I'll start with you.

Judge Karen Brown Willcutts [00:19:15]: Sure. I think this is a long-term piece of advice, and again, as Hugh said a minute ago, some of the best lawyers in the world are going to be working on these cases and these issues. But even so, as has been mentioned, a lot of these contracts are old, and I guess one of my key takeaways would be, when it comes to the force majeure clause in these contracts, and I think we're going to be seeing it especially in this whole situation with the strait, that they can probably be improved in a lot of ways to make sure that the parties are limiting, or hopefully temporarily suspending, contractual obligations would be one of the things. And then limiting exposure to damages and terminations of contract in the meantime, and being very specific about the types of issues that are going to be helpful in an oil and gas case in an emergency situation. And then the whole clause would also be careful to preserve the relationships, because a lot of these companies have worked together for many years. So I think in general, take a really close look at your force majeure clause, especially in the realm of these kinds of emergency situations, and make sure you're handling every possible angle that you can to protect yourselves.

Moderator [00:20:57]: Hugh, what about you?

Hugh Hackney [00:20:58]: I think it's very important for everybody involved, particularly the contractual parties, to be proactive. I think they have to anticipate these things are going to happen, and how we are going to react to them. And my experience has been that most legal departments have done that, and they also have crisis management in order to deal with the publicity and the negative impact, or failure to be able to deliver or perform.And I think those things are very important. The other thing is, you need to get as much information as you can about where the situation is and not wait to be reactive. You're going to be proactive, and you're going to operate from knowledge and not from assumption.

Moderator [00:21:49]: And Zee?

Zee Claiborne [00:21:50]: I agree with both of my colleagues about this, and I would add, I think that the decision-makers in charge at the very beginning should stay flexible while considering solutions and be strategic about what they do. In other words, don't draw a hard line on issues with the other parties early on. It's best to preserve business relationships until you can't.

Moderator [00:22:17]: Judge Willcutts, Hugh, Zee, thank you so much for being on the podcast. We really appreciate it.

Zee Claiborne [00:22:27]: Thank you.

Judge Karen Brown Willcutts [00:22:28]: Thank you.

Hugh Hackney [00:22:29]: Thank you for the opportunity.

Moderator [00:22:32]: You've been listening to a podcast from JAMS, the premier provider of alternative dispute resolution. Our guests have been Judge Karen Brown Willcutts, Hugh E. Hackney, and Zee Claiborne. For more information about JAMS, please visit www.jamsadr.com. Thank you for listening to this podcast from JAMS.