Middle East conflict: force majeure and commercial implications in English law

The ongoing hostilities in the Middle East, set against a volatile global energy market and the resulting disruption to oil production, transport and pricing, have brought into sharp focus a number of complex legal issues relevant to English law governed by international supply contracts.

• Read more: what the Middle East conflict means for businesses

We consider below some legal and practical consequences for businesses navigating supply chain disruption.

Force majeure

In times of conflict, a question that frequently arises is whether a force majeure clause in a supply contract excuses parties from performing their obligations or from doing so on time. Force majeure clauses are contractual clauses which alter parties' obligations or liabilities under a contract when an extraordinary event or circumstances beyond their control prevent one or all of them from fulfilling those obligations.

Such clauses may give a list of specific events or circumstances, including fire, flood and even war, sometimes alongside wider, general wording, such as "or any other causes beyond our control".

Whether a particular clause relieves a party of contractual liability and the full consequences of this will depend on: the precise wording used in the clause; the allocation of risk between the parties provided for by the contract as a whole; the circumstances in which the parties entered into the contract; as well as the situation that has arisen. It is for the party relying on a force majeure clause – excusing its non-performance or late performance – to satisfy a court or other tribunal that this is the effect of the clause.

Commonly, force majeure clauses will specify the particular impact that the event or circumstances in question must have for the clause to be operative. Reference may be made, for example, to the event or circumstances having "prevented", "hindered" or "delayed" performance. These terms require different levels of impact on performance before a party may be relieved from liability.

For example, a shortage of raw materials caused by a legitimate force majeure event may hinder the performance of a manufacturing contract. However, if those materials can be obtained at a higher cost, the fact that performing would simply be less profitable – or even cause a loss – due to higher costs is generally unlikely to be sufficient grounds to absolve the party in question of liability to perform.

A party seeking to rely on a force majeure clause must usually also show that: the force majeure event was the cause of the inability to perform or delayed performance; their non-performance was due to circumstances beyond their control; and there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.

Consequently, for suppliers navigating force majeure events it is crucial to explore whether alternatives are reasonably available – including at higher cost, unless this involves breaching existing contracts.

Within the force majeure clause, there may also be formal contractual requirements to comply with, such as a requirement to give notice within a particular time and in a particular form.

Frustration

Since force majeure is a creature of contract rather than a rule imposed by the general law, if there is no force majeure clause, or it doesn’t cover the type of event which has arisen, an affected party may be able to rely on the doctrine of frustration.

However, it is very difficult to demonstrate that a contract has been frustrated. Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations.

One situation where the courts have held that a contract was frustrated was when war broke out and the government banned the works and seized and sold the necessary equipment.

As with the test for "hindering" performance under force majeure clauses, the fact that performance has been made more difficult or costly is not enough.

A delay in contractual performance because of the conflict in the Middle East will likely be temporary and, one would hope, relatively short term. Temporary impossibility or delay is not by itself a ground for frustration. However, it may frustrate a contract in two circumstances; where time is 'of the essence'; or where the length or the extent of the delay is so extreme as to amount to frustration.

Arguing frustration may also be commercially undesirable in some circumstances, since its effect is to bring all parties' obligations under the contract to an end immediately, regardless of the wishes of the parties.

Material adverse changes and events

A ‘material adverse change’ (MAC) or ‘material adverse event’ (MAE) clause allows one party to avoid, suspend or renegotiate its obligations if a specified materially adverse event or change occurs. These clauses are designed to protect a party – often a buyer or lender – against unexpected and significant deterioration in the target business, the borrower, or the wider environment between signing and completion or during the life of the contract.

A MAC or MAE clause may be triggered by various events specified in the contract, such as macroeconomic or geopolitical events, including war, sanctions or oil supply disruption. The change must usually be substantial, durationally significant and not merely temporary.

These clauses tend to be heavily negotiated and whether a MAC or MAE has occurred depends on the precise wording and the factual context.

Practical considerations

There are a number of practical steps that businesses can take when navigating such extensive supply chain disruption:

• consider in detail the precise wording of any force majeure, MAC or MAE clause, including reference to specific events;
• explore alternative means of performing, reducing delay, or minimising any loss to the other party;
• serve any notices as required under the contract, as soon as possible and in accordance with the notice provisions;
• do not attempt to rely on increased costs to excuse non‑performance or delay, as this will not usually be sufficient;
• keep a documentary record, particularly of why performance was impossible, hindered or delayed as the case may be; the steps taken to find alternatives and mitigate loss; and the service of any notices;

• consider enhancing any contractual termination rights, such as an expressed right to terminate for any extended period of disruption or delay to performance or the use of a step‑in provision to allow for temporary use of alternative suppliers during a period of disruption.

If there is no force majeure clause, businesses can also consider frustration as a viable option. However, as mentioned above, they must mindful of the high bar for establishing that a contract has been frustrated and that consequentially it will release both parties of their contractual obligations

As businesses attempt to navigate these challenging geopolitical headwinds, it is advisable to consider other routes and remedies under the existing contract, or through agreeing binding variations to contracts with other parties.