Red Sea shipping crisis costs redress possible via Middle East civil codes

Pamela McDonald and Aya Elwadia of Pinsent Masons were commenting after months of attacks on cargo ships passing through the Red Sea by Houthi rebels. The attacks have arisen in the context of wider conflict in the region, following the attacks on Israel by Hamas on 7 October 2023 and Israel’s subsequent response.

The attacks by the Houthis have had major implications for global trade. This is because the Red Sea links into the Suez Canal, a major trade route that enables goods to be shipped to Europe and the Middle East from Asia.

According to analysis by JP Morgan, the Houthi attacks have prompted a rise in shipping costs, with many shipping companies choosing to re-route around the southern coastline of South Africa than take the more dangerous passage through the Red Sea. This has had implications for the supply of goods and materials, with delays in supplies arriving and the added shipping costs passed on to buyers.

McDonald said construction contractors active in the infrastructure and oil and gas sectors are among those businesses impacted by the supply issues. She said the issue plays into broader concerns that businesses in those sectors have had about inflation in recent times, which has been linked to the conflict in Ukraine, increasing energy and fuel costs, labour shortages, and material price inflation, among other things.

“The problem contractors importing goods and materials have is that they are often locked into fixed lump sum contracts, where the value of their contract may not sufficiently reflect rises in inflation caused by, among other factors, geopolitical instability,” McDonald said. “Often , especially in the Middle East, contracts will not provide express remedies for such a situation, however, contractors can look to principles of civil code and public law in the jurisdiction they are operating in for potential options for claiming their increased costs back from the employer or developer on their respective projects.”

“As we have previously highlighted, the principle of ‘economic hardship’ – which essentially provides scope for relief in circumstances where there has been an unforeseen event that renders performance of a contract excessively burdensome – is codified in the civil codes of states like Qatar and the UAE. It may be possible to argue that the effects of the Houthi attacks constitute a trigger for such relief. Contractors should be exploring their options in this regard,” she said.