Bottlenecked at the Strait of Hormuz and the cost to global trade | Commercial Awareness Compass #71

Hello everyone and welcome back to the commercial awareness compass. My name is Daniel Shepard and I'm an Eskiewee student and future trainee solicitor. This week we're looking at the escalating tensions between the US, Israel and Iran and the commercial impact that's followed. What began as a target to strike some military and nuclear-related sites has developed into a wider regional situation, including missile exchange, threats to key shipping routes and increased geopolitical uncertainty. From a commercial perspective, this has already feed you through into energy markets, global trade, insurance and financial instability. Oil prices have reacted, supply chains are under pressure and businesses are having to navigate a much more uncertain environment. This week I'm joined by Henry. Henry, thank you for being here. Could you briefly introduce yourself and kind of explain a bit about what you do? Yeah, sure, thanks for having me Daniel. Hi everyone, I'm Henry, I am a commercial lawyer and I am a content manager. I'm a content creator, talking all things, the legal profession and broader. As you mentioned, Dan, we're talking about the ongoing war between the US and Israel and Iran. I know that it's kind of maybe the big dominant thing in the news at the minute. You can't really sit, look away and see anything about it. Even if you're going to the petrol station, you know that something's going on. I think it's the time record around £1.90 for diesel, which is just barbaric. But in simple terms, what's kind of happened and how is the situation escalated? Yes, as you kind of mentioned, the conflict between US and Israel on Iran started earlier this year, I think February time. The reasoning put forward is that there were concerns by the US and Israel, are we the sort of nuclear regime of Iran and the leader of Iran at the time. So they carried out various strikes on various points in Iran, which then of course resulted in, as you mentioned, retaliation strikes and off the back of that. We have seen an increased number of casualties. We have seen regional instability as the war has kind of spreaded to Lebanon and have been threats to expand, trying to extend and expand at the same time. It's caused major disruption to global energy supplies, as you mentioned, down the price of petrol and diesel is through the roof. And I think I saw somewhere today that there's talk of encouraging companies to stop letting people come into the office and encourage work from home, just because of their concerns around oil shortages and energy, shortages, particularly with the rising prices. And today, at the time of this recording, the ceasefire efforts still seem futile and it looks like we're not going to see anything around that at the moment. So we're seeing a huge geopolitical point of concern and we're seeing huge commercial repercussions, as you mentioned, the straight off-hormus is closed, which is always open one minute, close the next. And that's a key to trade route for companies and countries all across the world. And we are seeing kind of the implications of that. And of course, as law firms, at the clients, a lot of these clients, particularly with the energy and infrastructure sector, will be affected by what's going on. So you mentioned the straight off-hormus. Why is it so commercially important in this case? Yeah, so what we're seeing with the straight off-hormus is that that is a key trade route for so many countries and for goods and so many other things. And what Iran have basically said in retaliation to the attacks on its country is, well, do you know what is closed for everybody? I think maybe China had a special relationship, so certain ships for China were able to go through. But for the rest of the world, particularly the US, in Israel, shut. So that then means that goods cannot pass through and ultimately the business cannot take effect. So because it's such a key route, keeping that closed, just having this huge global market sort of implication and that's why Iran is kind of using this as its negotiation point that you can have access to this. And then we're seeing the US come back like blockades and things and it's a whole cause for contention. But ultimately, from a commercial perspective, is that this is impacting clients. This is impacting. And we talk about sort of the cost of petrol and diesel sort of tankers and large, what are they called? What are the huge trucks that haul goods around the country and across the countries? There's costing more to run them, there's costing more to run machinery. And it's costing more to fill up our own cars to get to in from the office. So that's going to have implications on business and ultimately it's sort of corporate commercial and law funds. That's what they're here to do is commercially advise their businesses. I guess you've kind of hit one of the nails on the head with the way that things have changed so quickly. So one minute things are open, one thing's a minute things are closed. Some people say it's open, some say it's closed. You know, it's a world we live of information that's been put out there. Why does uncertainty itself create risk for businesses and investors? I think, well, just as lawyers, we don't like uncertainty. We like clear drafting. We like knowing what the obligations are and we don't like risk. And I think for the most part, that is the same with business and where you have an unstable market, where you have sort of trade disruption, supply chain disruption, where you have variables that you can't necessarily predict from one day to the next. We've got huge levels of risk then for clients, things aren't delivered. What happens then? Whose responsibility is it? Shipping routes can no longer be followed. What do we do? How do we get around that? What does the contract say? What if goods cannot be supplied? What's in the risk? What does it say within the remit of forced measure? Do we have war? A lot of forced measure clauses have war in there. Terrorism, fights, whatever it may be, is contained within a forced measure. So should we be looking to invoke that clause? So lawyers will need to be looking at the client's contracts and thinking, okay, this has happened. What is the risk? Where can we mitigate risk? In markets of volatile, for example, then that creates financial uncertainty. So say you're a company you're looking to get investment or you're trying to refinance a loan or whatever it may be. If you're doing that on a volatile market, that's going to be a lot harder because lenders are going to be like, whoa mate, this isn't looking good. There could be huge interest rates. It might be difficult to refinance. One of those points that because of this instability, one of the biggest things that we want to be looking at for our clients is making sure that any risk of financial loss is mitigated, regulatory breaches are mitigated. And ultimately, what can we do to safeguard our clients' interests and business through something that's ultimately happening outside of their control? How do we react to that? I think that that now moves us to the intermediate perspective and looking at the kind of advice that a lawyer might give. I think, you know, when we've talked about this in some sort of, you know, international tensions, one of the words that gets thrown around so much is sanctions. Sanctions have kind of dominated the conversation around this. It comes to like sanction and compliance. What should clients be focusing on immediately? I think one of the first things that you want to do is a business operating is speak to your lawyers and proactive lawyers in teams should be reaching out and should be being proactive to say, okay, you work in the energies and infrastructure's market. This is happening. This is probably what you want to do. Let's have a look at your financial arrangements. Let's have a look at what your supply chain is. Let's have a look at the regimes that you're kind of operating in and what's the risk to you. Here's a check. There's things that we think that you should be looking at. And these are the things that we can kind of discuss. Have you spoken to your counterparties? What's their positioning? Because whilst there's maybe affecting our clients, the other part to the contract is also going to be affected by this. So what sort of commercial reasonable discussions can we have? We don't want to just jump in suing everybody because they're not delivered. Equally, we don't want to be sued. we haven't been able to deliver because the straight up home is closed or the cost of doing so because of oil and petrol diesel costs, the ETC are through the roof. So it's kind of just taking a step back, identifying what the risks are and looking at how we can best mitigate them. Now I was going to mention this in the advanced section but I think it's probably the right time to mention it now. When obviously tensions are escalating and they're still like this is going on a lot more, do you think the contracts are going to be a little bit more proactive in taking into account geopolitical risks? Do you know what? I think if they are not already and I say that because we've had the ongoing war with Russia and Ukraine and we also have implications of that on petrol prices for us on the day to day, the cost of energy, ETC, if they're not already doing that, then I think this will be another one of those things that people think, "Whoa, okay, we need to have a look, what does our force-major clause say?" In the same way as when COVID happened, nobody thought about pandemics or epidemics in a force-major clause. Now given the way that the US has been, the way that we had been just Donald Trump and his presidency in general and the impact that that has had on, if we talk about sort of territory tariffs and all of that stuff, if we also look at how Israel have been with the war on Gaza and then we now have this ongoing war with the US and Israel, which are at the center of a lot of the geopolitical sort of unrest at the moment. I think those within supply chains and operating in certain markets will be reviewing their contracts. I think these are risks that keep coming up. What can we do? But equally, so I do think it will do that, but I also think from a business perspective, it may encourage discussions around reliance on other systems, so say we've been doing this, this, and this, and I'll supply chain, but actually it keeps being impacted by this. What's a more sustainable way, what's a different way that we could be operating that actually mitigates that risk and maybe over the next however many years we can just phase that out to this. So I think there could also be a sort of business shift as well in terms of how clients are operating. Yeah, it's one of those difficult things where you've seen that tensions have kind of gone up in maybe the last few years and then, you know, especially people's terms run out of different administrations, you know, loads of be planning for that, or even though that's difficult to plan for and it's kind of a difficult thing to see whether clients are going to shift drastically or whether they're going to hold put. I think it's the same sort of conversation that we had when it came to the tariffs conversation, whether people are going to make big moves or whether people are going to stay put and kind of ride out the wave and hope that things might improve. And I guess that's the role of a lawyer to make sure that they're, you know, commercially aware enough to be able to, obviously, the kind of fortune to help, but, you know, to see the trends that come in to kind of maybe even use it as an opportunity to take risks and kind of, you know, make sure that whoever they're working for can kind of ride out these sort of situations. Yeah, and as you said, this is very sort of past moving. Things are changing all the time you and ever you open the news, don't try to set X, Y, and Z, and the next day this is happening. But then also, if you, on the point that you mentioned around, do you think something like this in the continued uncertainty, what impact sort of contractual reviews and how businesses operate, which we just said we think they will, is this is kind of similar to when Brexit was coming into effect. I think because so many people thought that would happen, maybe they weren't as proactive in actually making sure that their systems that business was ready should this not happen, generalizing. But then obviously it did happen and there was a huge, huge shift and because we've now had unfortunately, like back to back wars in certain regions, you can kind of see that actually we do need to be a bit more proactive around this and actually think this is going to cost us a lot of money. What can we do to reduce spending and to mitigate risk because that's ultimately what we're here to do as lawyers is to make sure that our clients are protected and clients don't want to spend or lose money if they don't have to. And I think further down the line is potentially we're seeing in the news that the UK is forming types of bonds with the EU, we may see a shift in that as well and it will be one of those things where we will see how businesses respond to that but that will probably be a future compass episode on close to ties between the EU and the UK. And you know we've talked about how companies are trying to prepare even like legally within contracts and stuff but I guess another role that's played in all this is insurance and kind of insurance policies and so on. So do you want to dive into that like from a finance perspective, how does this volatility affect kind of lending, financing and insurance around this? Yeah, I think that insurance, let's start with lending actually, lending as we spoke about earlier when there's a volatile market, it may be more difficult for companies, organizations to look to refinance, to look to take on like credit lines or whatever it may be that they're seeking to get. They may have to give extra security to the lenders, ETC but of course that would be for the finance and banking lawyers within your firms to kind of assist. Pretty particularly those that work in sectors that will be affected by this to say well actually that's considered x, y, z instead. And in terms of insurance I think it will be one of those things where if say for example a supplier is being sued because they cannot perform because goods cannot be transported whatever it may be, you may have certain businesses and assurances to cover that but then what it may be or require those lawyers that operate again within that space. And I think again it's one of those stories that like most of them actually that showcase the various different departments or the various different types of lawyers that could all be working on one commercial thing. But going through the insurance policy and actually saying what does policy pow because there's probably exclusions in there. What are those exclusions? Do those exclusions cover war because if there's an exclusion that says we won't pow in x, y, z war circumstances, we're kind of stuck and then your client's going to foot that bill or sorry even the process of negotiating. Negotiating sorry a new insurance policy what do you want to make sure is included so actually your business has that protection so in certain circumstances. I guess you know especially when things are escalating. I imagine the insurance market just kind of goes into a bit of a panic almost if it's like do you know whether it's like do we do we assure against these risks and then obviously insurance might be like oh well we won't insure against these risks or you know it's it's such a kind of complex matter and it also goes back to that kind of risk. The level of risk that businesses and companies are willing to face in order to maybe enter certain markets or you know if they try to like you know divers find stuff like that whether they it's worth doing it if they're able to get insurance against these risks or be whether insure as a kind of willing to put up with those risks especially as things kind of rise intentions. Yeah and also how much businesses are willing to pay because ultimately if you pay if you pay the right price you can get like more coverage and you can get more things like there's basically car insurance for example you pay more you get the top level comprehensive covers so businesses are willing to pay more but ultimately if insurance policies are having go insurance providers are having to pay out more than premiums just more generally I'm going to go up. Well we'll move to the advanced section and I think it's been nice to kind of carry on where we've we've just talked about about like kind of the diversifying and risk exposure for businesses but So do you think businesses are increasingly looking to diversify or de-risk their exposure to certain regions? I would say yes. I think there's probably organizations that are looking to reduce their alliance on where they operate and if that operation is in certain regions because of the risks that may come as a result, for example, a lot of organizations that operate in the Middle East. For example, they may be considering operating elsewhere, but some organizations may not necessarily have a choice at the moment where they are kind of operating. So I guess it kind of depends on what stage they are in terms of their organization. That's an option, but it is not an option. It's kind of, "Okay, well, this is where we're at." Again, I know we've said it a lot, but how do we mitigate the risk of our operation? Here, and even from a security perspective, how do we operate in a way that's secure and safe and if we've got people operating out there, for example, what do we do around that? But as we mentioned earlier, it could be that if you've got an organization that's very heavily reliant on oil for energy and stuff, actually maybe they're thinking, "Oh, well, let's just accelerate," are what are they called? Sorry. I pushed renewables and look at other solutions that actually can generate energy. So maybe we can't go fully 100% renewable, but if we can kind of trickle that in, things like this and where there's that geopolitical uncertainty and it could cost us more money in the long run. Maybe if we start accelerating our personal reliance on renewables, actually that's a way of de-risking that position. Yeah, that's one of the things that I was thinking that especially as things kind of go in price for petrol and diesel and such, whether more reliable energies, like sourcing more reliable energies, it seems to make more sense. I know recently, like a few people I know have bought electric cars because they get free charging at work and then they're able to kind of offset some of the costs that they have faced, if they've had petrol diesel car and if companies have noticed that these changes have been made, then maybe as you say, an energy company might look a bit more into renewables or solar or wind or especially areas where it's maybe a little bit less volatile. Yeah, and that's so funny, I'll read that as always, not that funny actually. It's just quite interesting in a sense that I saw something this morning that said because of the rising cost of petrol and diesel that there has been an increase in the uptake of EVs which I think it's really great, but then if we see that, we're probably going to see employers say, well, actually we're not going to offer free charging anymore because we're not able to, it's not sustainable for us to be providing that. But yeah, I'm all for an EV. I think if people want to push to that, I think it's great for the environment. And if you know, it'd be interesting to see whether businesses are aligned with that. If there's demand in a certain area, we've probably said it's time and time again, if the demand's there, then businesses will follow it. I guess kind of to round out this topic, and it's kind of a very broad question, but kind of like, where does illegal work grow from in this sort of area? What kind of where does the illegal work come from? What kind of direction can it go in? Is there any areas that might increase or not? I think if we just focus on something like the war and that's probably going to go on for quite some time, I think one of the biggest things when you're carrying out sort of commercial reviews or you're commercial advising clients is this is going to be a huge commercial risk. For a lot of businesses globally in this geopolitical uncertainty and the risks that come from that is something that we as lawyers are going to have to advise on our clients. And that could be, we can have more dispute being bought because we're not performing the contract to any cheese force measure, we need to look at insurance, energy and energy and infrastructure lawyers will need to be involved in terms of, well, where is the energy coming from? Is the oil we've got this straight off most that's closed in terms of trade, so those that operate within that sector will need to be advised, finance and funding, finance lawyers will need to be involved in that as well. And just commercially commercial lawyers will need to be reviewing like supply chain contracts and working with businesses to review their supply chains in general. So again, it's one of those things that whilst we have like one key issue, obviously quite big key issue, it affects so many different functions within a business itself. And I guess it's kind of for law firms to try and position themselves in a way that, you know, supports clients in this sort of environment where, you know, if things are kind of changing quite regularly and, you know, if certain regions become more tense, especially where like clients may be operating out of just making sure that they've got the necessary like tools to help them manage these sort of things. And I know you mentioned that kind of like arbitration may go up and stuff like that. And I know London especially, I've written an article about it the other day that London's kind of for international arbitration is just kind of blown recently in the last few years. It's just kind of, you know, got massive. So maybe if some people listening, training a London firm, they might get some, is there in an arbitration seat, they're upset maybe dealing with some of these matters, but yeah, it's going to be weird to see how kind of firms shape their businesses to meet these needs. And like, you know, we talk a lot about maybe small changes in legislation and stuff like that, but it's because it's such a huge issue impacting so many different areas and so many different regions. Yeah, it would be very interesting to see how kind of firms adapt to spot clients in this sort of environment. Yeah. And I think actually the even law firms themselves will be affected by like geopolitical ongoing in matters because a lot of clients may want to put transaction deals on hold until such time is markets calm down or lenders are lending it normal rates or whatever it may be, which then in turn means there's less work. Especially as the transaction heavy firm, which then in turn means there's less money coming into the firm because clients are putting everything on hold, which means there's less work for people, which in turn means layoffs because they don't need to be paying all of these people if there's actually no work for them to do. So I think as always, when you see a story like this and you hear phrases like straight up on those as close to nose open again and you're seeing these things actually take a step back and say, so what, what does that mean? Not practically like, oh, it's sharp. It's open. But what does that mean in terms of it is going to affect businesses? Okay, of course, so what? How's it going to affect it and just kind of keep digging deeper and ask yourself, there's kind of commercial questions of what are the actual implications of this? Yeah, I think that nicely, nicely round it off because I say, I think it, you know, we've just kind of just took service of it on this episode, but there's probably, you know, hundreds of different things that we could discuss. I know we've talked a lot about energy and such, but you know, there are so many different avenues, whether that's like, you know, marine shipping or whether it's, you know, if you're looking at, well, international law or, you know, there's so many different areas where this, you know, you know, what's going on here just leads on to impact on to impact on to impact. And it's just kind of follows that change and chain and following it up saying, and what does this mean? And what can this mean in turn? Yeah, I think it's going to be one of those things that, you know, we may end up coming back to because of the, the fallout and implications because it's just going to be so massive. So, yeah, I think, I'm sorry, did you have one, I think, I said it for every of you. Definitely. It's, yeah, I think we will be, we will definitely, we'll be coming back to another episode on this because it's, it's that big. But, yeah, that brings us to the end of this week's commercial awareness compass. So a huge thank you, Henry, for breaking down what, you know, such a complex and evolving situation. And importantly, kind of what it means for clients. So the key takeaways is global events like this quickly translate into commercial and legal risk and businesses rely on lawyers to help them navigate that whether that's through compliance, contracts or strategic advice. So as always, ask yourself, how does this affect clients and what can a law firm do to help? Join us next week to keep building your commission. awareness and until then prepare without the panic. Thank you.