Implications of the Middle East conflict for businesses

For businesses, the conflict raises some immediate questions and challenges – from looking after their people, to disrupted supply of goods and services, the performance of contractual obligations, and financial resilience.

Below, we look at some issues in more detail and explore what options businesses have to address the risks they face.

People

While some state authorities in the Middle East have been using communications networks to issue warnings to shelter from the risk of missiles, a clear desire has emerged for everyday life – including business operations – to continue on a ‘business as usual’ basis, as far as is possible. This apparent paradox raises ethical and legal questions for employers in the region.

For example, while labour law in the UAE would support employers that might insist on employees’ physical attendance in offices, consideration needs to be given their health and safety obligations and to whether the legal position is altered by any government directives, the specific contractual rights employees have negotiated, and the impact that refusing reasonable requests to work remotely may have on the workforce. Equally we know that some employers are encouraging all staff to work remotely and some employees are requesting to return to the office for their own personal wellbeing and because they consider the office to be safer than their accommodation. 

In addition to physical safety, employers should also give careful consideration to employees’ emotional wellbeing and overall welfare, recognising that heightened regional tension can affect mental health even where there is no direct physical threat. Employers may wish to support emotional wellbeing by offering access to employee assistance programmes, promoting open communication, encouraging the use of mental health resources, and ensuring managers are equipped to identify and respond sensitively to signs of stress or anxiety.

In the case of some foreign nationals in the workforce, some governments of other states have issued formal recommendations to evacuate. This too creates a tension between what the law and formal workforce policies says about remote working and the practical effect of such advisories. Employers might want to consider relaxing travel policies to support workers in accessing flights and they will need to keep in mind that a foreign national’s right to work in the country could be invalidated if they are absent from the country for an extended period. Subject to the legal position, employers are offering extended periods of remote working from outside of the region, immediate annual leave and unpaid leave to support their employees where this can be accommodated.

Supply chain

As supply chains are disrupted, including as a result of the risks to shipping in the Strait of Hormuz and airspace restrictions, suppliers and buyers alike will be looking to contracts to understand the rights and remedies available to them.   

Depending on the circumstances, it may be relevant to consider a range of contractual provisions, including force majeure, material adverse event, termination, price escalation and extension of time clauses, as well as potential arguments about frustration.

Businesses affected by supply chain disruption should seek advice on the options available to them. Businesses should exercise caution but act expeditiously. Wrongful termination of a contract can carry significant adverse consequences: some contractual rights may depend on their being exercised promptly. 

It will be crucial to understand which laws govern any given relationship or situation and to take legal advice on the position under those laws, as different jurisdictions take different approaches to key legal principles such as force majeure. For example, under English law force majeure is a creature of contract, so the focus will be on the precise contractual wording, whereas some jurisdictions, including many in the Middle East, make statutory provision for force majeure and similar circumstances. 

In infrastructure contracts, businesses should give careful consideration before claiming for force majeure. This is because, while successful claims for force majeure may give rise to extensions of time to perform contractual obligations, there is usually no entitlement to redress for the financial impact of the event. In some jurisdictions, including in the Middle East, alternative statutory remedies may be available.

Some businesses will wish to map all affected and potentially affected contractual relationships and their position under those contracts. Businesses should keep good records of the impact of the conflict on them, including any steps taken by them to mitigate that impact. In some jurisdictions, such as England, parties seeking to rely on force majeure must usually show that they have taken reasonable mitigation steps. Records of any losses suffered will also be important.

Businesses should map supply chains and, where applicable, alternative suppliers to whom they may wish to look for continuity of supply.

Consideration needs to be given to the potential for supplier failure. A full supply chain audit can help surface issues and customers may wish to explore renegotiation using formal restructuring tools.

Finance and liquidity

Disruption due to airspace restrictions, shipping delays and rerouting can trigger challenges with logistics and operational bottlenecks. These supply chain issues can lead to longer lead times and increased costs and pressures on working capital. Regional instability reduces demand and impacts sector-specific revenue streams, heightening operating stress and liquidity risk.

In funding markets, investor sentiment may weaken in the Middle East region, increasing pricing and reducing appetite for regional credit exposure. Businesses may want to reassess refinancing windows, diversify their lender base, enhance liquidity management, and pre-emptively engage with investors. 

Elevated market volatility drives liquidity risk through margin calls, cost inflation and customer non-payment. Reliance on volatile energy inputs further stresses cashflow. This may merit increasing the granularity of cashflow forecasts, setting aside liquidity reserves, and securing contingency credit. 

Credit quality deteriorates as counterparties face economic stress, heightening credit risk. Supply chain delays exacerbate eligibility failures, causing liquidity tightening. Businesses should look to strengthen credit governance and improve early warning triggers. They may also be able to make increased use of credit insurance.

Tightened credit risk and trade disruption reduce receivables quality. Buyers in impacted regions may hit liquidity pressure, triggering default events under financing lines. Businesses should look to identify exposed receivables, revise advance rates, and update concentration and dilution settings. 

In distress scenarios, potential defaults and default events become more likely under debt documents. Directors must monitor solvency closely as duties shift to creditors. It is advisable to obtain early legal and restructuring advice, to monitor compliance with covenants, and to contingency plan. In some cases, formal insolvency processes may need to be considered. In the UK, options include administration, restructuring plans, and company voluntary arrangements.

For supplier businesses, customer distress intensifies their own credit risk, heightening exposure to unpaid invoices and potential insolvency filings. Suppliers should seek to strengthen credit controls and put in place early warning indicators. Use might also be made of retention of title clauses in contracts to minimise risk of non-payment. Diversification of the customer base will also help suppliers to de-risk against their exposure to financial problems experienced by individual customers.

Compliance

The conflict raises certain compliance issues for global businesses, one of which concerns sanctions – in particular, the suite of sanctions put in place by the US, EU and UK.

Organisations should assess their operations and ensure they do not contract or trade with a sanctioned individual or entity, or one owned or controlled by a someone sanctioned, or otherwise engage in trade – the provision of goods, technology, software or services – prohibited by sanctions without an appropriate licence to do so.

Businesses are advised to review and implement continuous monitoring of sanction developments, screen counterparties against up-to-date sanctions lists, and update their due diligence practices to include, among other things, end user verification. Where required, licences from sanctions bodies should be sought. Where a trading partner is sanctioned, businesses should consider ways to wind down the relationship and whether wind down licences are in operation.

A specific assessment of trade sanctions risk is advisable. Businesses should review the logistics around the transportation of goods and materials, as well as review contracts and update them where they can to include sanctions-related provisions.

The Middle East conflict might also trigger due diligence and reporting obligations for companies.

Many businesses face ESG-related duties under legal or regulatory regimes they are directly subject to or by virtue of the contractual duties they owe to others, including lenders.

The conflict is causing, and will continue to cause, civilian casualties, and instability affecting civilian communities across the region. This could exacerbate refugee flows and cause significant harm to human health and living conditions. Businesses should consider the extent to which they are obliged to assess such risks, mitigate adverse impacts, and report on human rights and social issues in their operations and supply chains. 

The conflict could also have implications for organisations’ climate transition plans and related disclosures. Scenario planning for complex scenarios including geopolitical risk and climate risks is advisable.

Periods of conflict often lead to increased cyber risk, with higher levels of phishing, impersonation and disinformation, with generative AI enabling criminals to create very believable content. Businesses are advised to advise staff to be more sceptical of unexpected emails, texts, WhatsApp messages and calls, and to emphasise internal reporting channels.

Many businesses will have data and cyber incident response obligations and should ensure robust incident response processes are in place, tested, and put into effect as soon as possible after an incident in order to meet their obligations under law or contract.