Conflict in the Middle East: Key considerations and risks

Whilst we all grapple with the economic and humanitarian consequences of the escalation of conflict between US/Israel and Iran this weekend, we have been approached by clients concerned with protecting their legal position in these difficult circumstances.  Enquiries are ranging from force majeure and insurance to supply chain disruptions and other commercial matters. In this article we outline some of the urgent considerations for companies with operations in the region, particularly in relation to notifications to preserve claims or defences.

Force Majeure: It is common for force majeure or government risk clauses to provide relief for an unforeseen outbreak of war or hostilities. We expect that many companies in the region, particularly those involved in the development and construction of local projects, will have already considered or either (i) sent a notice of force majeure; or (ii) received a notice of force majeure from their counterparty. Timing is important as force majeure must typically be notified in accordance with the terms of the clause.

Governing law also matters:

• Where the contract is governed by English law, the availability of force majeure is a matter of contract and your recourse (or the recourse of your counterparty) is expressly confined to the precise terms of the relevant clause. The exact wording is very important and can have a dramatic impact on how the clause operates and the extent to which relief may be available. It will be critical to pay close attention to the questions of what aspects of the current conflict are within the relevant definition, and to causation between the conflict and the disruption.  For example, some clauses will require the unforeseen event to actually "prevent" performance of the contract whereas others may apply a lower threshold where relief can be obtained if performance is "hindered" or "delayed".
• Many force majeure clauses require the affected party to take steps to mitigate the impact of the unforeseen event on their performance of the contract and, in any case, the English courts have taken it as an implied term that any party seeking to rely on force majeure must have taken reasonable steps to mitigate the effects of the relevant circumstances. 
• For contracts governed by other laws (e.g., UAE law), parties may, in some situations, be entitled to suspend, delay or excuse performance even where the contract does not contain an express force majeure clause depending on the applicable statutory provisions.

Companies impacted by the current regional conflict should closely review the scope of any force majeure clause in relevant contracts to best understand their rights and those of their counterparties. Importantly, any steps to mitigate should be undertaken in parallel even where a force majeure clause has been triggered.

Extension of time / Disruption claims in construction contracts: It is possible that companies involved in the development and construction of local projects or projects contingent on international supply chains will receive claims for extension of time / disruption from contractors and / or subcontractors. Many of these claims will be linked to notices of force majeure. For employers, it will be very important to consider any genuine entitlement that contractors may have, which may be assisted by early input from a delay expert, and to ensure strict compliance with any notice requirements (for example requiring sufficient detail from the contractor). For contractors, care should be taken to ensure that all notices are compliant with the requirements of the contract and that proper substantiation is given where possible. 

Material Adverse Change (MAC) clauses: As with Force Majeure, the ability to trigger a MAC clause – a key provision designed to allow parties to opt out of a transaction when an unforeseen risk arises that materially affects the business operations of a target company, or both parties in the case of a merger – will depend on the precise scope and wording of the clause. There is surprisingly little English law authority on what constitutes a MAC. Typically, the unforeseen risk must have a negative impact on a company's business and must occur within a specific timeframe. MAC clauses often exclude changes affecting the wider industry or economy (since COVID-19, they have often excluded pandemics). One issue to watch will be the extent to which circumstances have changed on a long term or persistent basis, and it may be difficult to determine immediately whether the threshold for a MAC has been met. However, if you are involved in an ongoing transaction and the target, your business, or the counterparty may be affected by the conflict, it is prudent to review the clause carefully and begin gathering data on the anticipated financial and operational impact to either support or resist a MAC argument. The MAC clause could be used as leverage to renegotiate valuation, seek additional warranties or introduce specific carve-outs.

Frustration: It is possible that some entities will be looking to de-risk by exiting all or certain of their contracts in the region. In the absence of contractual provisions permitting termination for convenience or, for instance, termination for a prolonged event of force majeure (see above), we expect that parties may assess whether the contract has been frustrated. Again, the governing law matters here:

• Under English law, a party has to be able to show that performance has become impossible or illegal or radically different from what was agreed. Accordingly, frustration is a very factually specific question and presents a high evidentiary burden for any party seeking to rely on it. 
• Under UAE and other GCC laws, there are specific statutory provisions dealing with situations where performance has become impossible or particularly burdensome on one of the parties.  Close attention is needed to these provisions.

Given the significant implications of a wrongful termination, we would encourage anyone considering terminating for frustration or in receipt of a notice purporting to terminate for frustration to carefully consider their options and seek legal advice if necessary. 

Insurance considerations: The conflict has already affected several key sectors, including energy, infrastructure, oil and gas, maritime, and aviation. We understand that many marine insurers have issued cancellation notices and/or increased premiums for vessels travelling through the Gulf and the Strait of Hormuz since the attacks began. The aviation war market is likely to follow suit. Any notices which seek to cancel or amend the geographical limits of your insurance cover should be scrutinised carefully with the assistance of your brokers to ensure they comply with relevant cancellation terms in the policy. Businesses should also review their insurance arrangements to: (i) confirm the scope of any applicable policy coverage; and (ii) assess whether any notification of potential claims or circumstances is required. Although war risks are generally excluded from standard commercial policies, they are often insured separately under standalone war policies and cover may also be available under political risk or political violence policies. We recommend promptly engaging with your brokers to ensure coverage gaps or notification deadlines are addressed without delay.

Supply chain disruptions: The regional conflict will no doubt test global supply chains – although the extent remains uncertain. The region accounts for roughly 30% of global oil production, and with ports and key transport channels being affected, further shortages and delays are possible if the conflict persists. Reduced air traffic and disruptions at major ports may create uncertainty around the timely delivery of goods. Companies might expect delays across shipping, aviation, and logistics networks and should assess alternative routing and contingency measures where possible. For those in the construction sector, this may also mean difficulty in bringing goods to site and (where contractually possible) potential price escalation claims. We recommend early engagement with partners throughout the supply chain and a careful review of the contract to understand stakeholder obligations notwithstanding the conflict. 

Practical Considerations: While we appreciate that this is a recent and rapidly evolving situation, companies should first and foremost prioritise the wellbeing of their employees and ensure that they are key safe and supported. In addition, companies should consider taking the following steps as a matter of priority:

1. Compile a list of all relevant commercial contracts that are or may be affected.
2. Ensure that any relevant or potentially relevant notices have been given, in compliance with the requirements of the applicable contractual provision(s) as to timing, level or type of information that must be provided, and method for communication.
3. Consider whether the current events give rise to any obligations (including notification obligations) vis a vis lenders or insurers (or, if you are a lender or insurer, vis a vis your portfolio).
4. Review the terms of each contract to evaluate your options / the options that may be exercised by any of your counterparties, in particular the wording of any force majeure or MAC clauses and the scope of any termination rights.
5. For project-related delay and disruption, consider early involvement of delay experts.
6. Collate evidence of the impact of the conflict (e.g., official government announcements and press releases from reputable international news agencies), whether to be relied on for the purpose of bringing a claim or for defending a claim. 
7. Assess options for negotiated commercial solutions with counterparties.
8. Ensure a clear right to terminate any contract exists before taking steps to exercise it, to minimise the risk of a repudiatory breach. 
9. Even if you consider that you have certain legal rights to terminate/delay/suspend, continue to take mitigating steps. 
10. Continue to keep any key developments under review. 

If you are experiencing any issues arising out of this conflict or have concerns that issues may arise please do reach out to the individuals shown below. Our team are highly experienced in the region and are on standby to assist however we can. We hope that all of our clients and their employees and families in the region are safe and well.