Gulf projects face new challenges amid global trade instability

The construction industry in the Middle East is gearing up for substantial cost increases due to global trade instability resulting from recent changes to US tariffs. Government-funded projects in Gulf countries are particularly vulnerable because of their sensitivity to oil price fluctuations. These new challenges come at a time when many projects are already over budget, largely driven by inflationary pressures from the surge in construction activity in Saudi Arabia.

Contracts in the region are typically awarded on a lump sum basis, placing the inflation risk on contractors. Price adjustment clauses are usually excluded, and material adverse change and hardship clauses are rare. This approach to risk allocation generally leaves contractors with limited options to manage escalating costs.

However, depending on the governing law of the contract, the impact of tariffs may be felt unevenly across the value chain. For many design or supply contractors whose works are governed by English law, there may be little relief from rising costs. English law does not imply a duty of good faith or recognise force majeure at law. The doctrine of frustration is also unlikely to assist where projects have become more expensive but remain possible to complete.

In contrast, the position may be different under contracts governed by civil laws, such as those for onshore construction works. Several GCC civil codes empower the courts (or arbitral tribunals) to mitigate and rebalance unduly onerous terms in exceptional unforeseen circumstances. 

Whether the recent period of hyperinflation – and any further impact of the recent tariff announcements – constitute “exceptional” or “unforeseen” circumstances is expected to be an issue before courts and tribunals in the months and years to come.