Conflict in the Middle East puts spotlight on contractual cost escalation mechanisms

Those projects now face surging prices for fuel, steel, cement, freight and other materials, along with increased costs for the transportation of equipment. Yet, when contractors look to their contracts for relief, they often find that standard clauses offer little protection from these broad market increases.

In practice, the risk of cost inflation and commodity price volatility is usually allocated to the contractor under Middle Eastern construction contracts.

Risks of cost escalation

Most standard construction contracts do not entitle contractors to additional payment for general inflation or commodity price spikes. In fact, they usually explicitly allocate the risk of cost escalation to the contractor – both in international contracts like FIDIC and bespoke Middle East ones.

As such, contractors may face challenges in seeking to rely on legal remedies or key contractual mechanisms, particularly in situations tied to oil price volatility.

• Under the prevailing lump-sum pricing model, the contract price is fixed and all-inclusive, meaning a contractor ‘has no claim’ unless the counterparty agrees. If the cost of executing the works skyrockets, the contractor cannot claim more money, unless the contract itself provides a mechanism.
• While FIDIC contracts contain an optional clause for cost adjustment, this applies only if expressly activated – for example, by including a formula and indices in the Appendix to Tender or Schedule. In practice, in many Middle East FIDIC-based contracts these clauses are usually deleted, with any rise or fall in costs deemed to be included in the contract price. Contractors whose agreements do not include an indexation mechanism will bear the full brunt of price inflation unless they can persuade the counterparty to share the effects of any increases.
• Variation clauses – such as FIDIC clause 13 - generally cover changes in the scope of work or design instructed by the employer, not changes in market prices. A drastic increase in steel or cement prices does not in itself constitute a variation under FIDIC contracts as the work itself is unchanged, just more expensive to perform.
• Similarly, change in legislation clauses typically grant relief if a new law or regulation after contract execution affects costs. The current oil price spike, however, is caused by geopolitical events and not by a change in law in the project’s country. Even where war-related government orders or directions have been issued, the extent to which they may qualify as a contractual ‘change in legislation’ will depend on how they have been drafted.
• Force majeure clauses are often the first place contractors look when crisis strikes, covering extraordinary events beyond the parties’ control. However, force majeure usually helps only with extensions of time unless the contract explicitly provides cost compensation, and many amended force majeure clauses explicitly exclude economic hardship.
• Even if a contractor finds a suitable contract clause to invoke, it will face practical hurdles in proving its case. Contractors must establish causation by demonstrating that cost increases are directly attributable to specific events rather than general inflation or unrelated market forces. This is compounded by high evidentiary burdens and strict contractual notice requirements, as claims may be defeated entirely if formal notices are late or insufficient, particularly where cost impacts cannot be identified immediately amid the disruption.

As such, contractual relief for cost escalation is very limited under typical construction contracts in the Middle East, with most contracts placing inflation risk squarely on the contractor.

Given this harsh reality, contractors may need to look outside the contract and towards general statutory provisions which may offer an economic safety valve.

Available relief and exceptional circumstances

Legal doctrines of “hardship” or “exceptional unpredictable circumstances” are available in many Middle East civil law jurisdictions, and can offer potential avenues of relief.

This doctrine - embedded in the civil codes of the UAE, Qatar, Oman, Bahrain and Saudi Arabia - allow courts to modify contractual obligations in extreme cases where performance, while not impossible, has become excessively onerous due to unforeseen events of a public nature.

In essence, if a contractor is hit with a significant cost increase caused by an event that could not have been reasonably foreseen, and which fundamentally upsets the economic balance of the deal, the court may step in to rebalance the contract.

This may include increasing the contract price or otherwise sharing the loss between the contractor and employer, rather than forcing the contractor to bear ruinous losses or abandon the project.

The hardship provision differs by jurisdiction. However the common criteria for it are that an exceptional event or circumstance occurs that could not reasonably have been foreseen or anticipated at the time of contract; it occurs after the contract is concluded; it is an event which is public in nature - i.e. does not only apply only to the affected project; and it makes the performance of the obligation excessively burdensome, even though performance is still possible.

Only when all these conditions are met can the court or tribunal exercise its discretionary power to modify the contract. This does not provide a wide opportunity for a contractor to recover losses or fundamentally change the provisions of a contract, as the application is narrow in its nature and the courts will consider a number of factors before considering intervening.

In the UAE, article 249 of the Civil Transactions Law allows a judge to reduce contractual obligations if unforeseen, exceptional public events make performance excessively burdensome. Any attempt to waive article 249 is legally void. This provision - known for codifying the concept of hardship - has been cited during crises like Covid-19 and regional conflicts. Remedies may include price adjustments, extensions or suspensions, but not contract termination unless absolutely necessary.

Courts apply this provision cautiously against a host of factors, and require strong evidence that the event was unforeseeable and impactful.

Article 97 of the Saudi Arabia Civil Transactions Law introduces similar relief, providing that a party may, when faced with exorbitant loss resulting from exceptional and unforeseen circumstances,  engage in negotiations with the other party in an attempt to re-balance the terms of the contract.

If the parties cannot reach agreement, article 97 allows judges to adjust contracts by weighing the interests of both parties in order to reduce the burdensome obligation to a reasonable level. This law is relatively new and its application is still evolving, with judicial willingness to intervene still to be widely tested.

In Qatar, article 171 of the country’s Civil Code (Law No. 22 of 2004) mirrors the UAE’s rules where unforeseeable events make performance oppressively burdensome such that losses might be considered “enormous”.

Where invoked successfully, the courts will consider the circumstances and the balance of the parties’ interests and amend any obligations reasonably. As in the UAE, parties cannot contract out of this protection, with courts requiring clear evidence that the event was truly exceptional and unforeseeable, caused significant imbalance and caused or threatened to cause enormous loss to one party.

Hardship and the current conflict

Applying these principles to the current scenario, the recent closure of Hormuz and resultant oil price shock could qualify as an exceptional, unforeseeable event of a public nature with widespread consequences.

If a contractor can show the closure has made their particular contract performance excessively onerous, there may be a case to be made for hardship. A court would then consider evidence, such as whether the contractor tried to mitigate, whether the loss could have been anticipated and what a reasonable sharing of this loss might be.

The key question is how the doctrine of hardship interacts with the contract terms.  If, for example, a contract clearly says “no price escalation”, can the courts override this? The answer varies from jurisdiction to jurisdiction but in extreme cases the law can potentially override such a term as hardship provisions are typically considered mandatory rules.

However, the existence of contractual risk allocation, as expressly agreed between the parties, may well influence the approach of the court in practice.

In addition, courts will consider whether the event “could not reasonably have been anticipated” and that the risk was not already assumed by the disadvantaged party. For example, if a contractor entered a fixed-price contract in late 2025 when oil prices were stable, they might argue they never assumed a major war and blockade would double prices. But the employer might counter that war in that region was not entirely unforeseeable, or that the contractor’s agreement to a fixed price implies an assumption of normal price fluctuation risk.

Generally, courts will not rescue a contractor from a bad bargain or normal market volatility. Hardship is reserved for truly extraordinary shifts outside the risk one would normally bear. The current situation in the region could be seen as extraordinary, but each case will turn on facts and timing.

So, while Middle East civil law jurisdictions do offer a form of safety mechanism in the hardship doctrine for contractors affected by unforeseen cost escalation, these provisions may not be a complete panacea and come with strict conditions and uncertainty.

These hardship laws reflect an underlying policy: when unforeseen adversity strikes, the loss should not lie where it falls if that is unconscionably one-sided. Instead, the law can step in to spread the losses more fairly between contractor and employer.

What this means for you

In the midst of the current volatility, contractors need to be proactive. Where disruptions have been encountered that are driving up costs - such as the ongoing Hormuz closure - the contract should be immediately reviewed so that measures can be taken to safeguard any potential claims or relief. Key steps include:

• Conduct a focused review of the contract to identify any provisions that could potentially offer relief or that govern risk allocation in these circumstances.
• Provide timely notice under the contract regarding the disruptive events and their impacts, even if there is doubt as to which clause applies.
• Start building an evidence trail of the cost escalation and its causes as this will serve both in formal claims and in any negotiation for relief.
• In parallel with the contractual steps, consider a commercial negotiation with the employer – adopting a cooperative, problem-solving tone can sometimes yield concessions that pure contract stance wouldn’t.
• Be mindful that even in a crisis, the contract likely requires you to mitigate losses and continue performance as far as reasonably possible

In an environment of oil price spikes and supply chain disruptions, contractors must be vigilant and proactive. Standard contracts are typically not in the contractor’s favour on cost escalation, so while time extensions may be possible for delays, absorbing extra costs is usually deemed the contractor’s risk.

The law in Middle East jurisdictions offers a potential lifeline through hardship doctrines, which can in extreme cases shift some of that burden back to the employer or adjust the contract to reality. The process of obtaining such relief can be lengthy and is not guaranteed, so it should be complemented by diligent and practical project and contract management strategies.