Briefing

Tensions in the Middle East: Managing disruption to construction projects

The ongoing tensions in the Middle East have created significant uncertainty for construction projects across the region. To date, the immediate focus has been to ensure safety. However, parties are now turning more of their attention to assessing the impact of the situation on their projects and their contractual rights and liabilities.

Cost and time are the main suspects when evaluating the impact to a project. Bases for claims range from price escalation, supply chains interruption, disruption to logistics, through to availability of insurance and skilled labour.

Some of the key questions to be considered are:

Is the project still economically viable?
Is the project practically feasible?
Who bears the risk for delay, disruption and increased prices?
Is this force majeure (the answer is not always “yes”)?
What are our options?

The answers inevitably depend on the specific circumstances and the relevant contractual provisions and laws. Construction contracts might include clauses that balance the risk of an unforeseeable event, provide rights to extensions of time (and adjusting the price) as well as allowing for suspension and eventual termination.

The applicable law may affect the position and, in some instances, may dictate what remedies are available. For example, for English law contracts, the availability of force majeure will be confined to the terms of the contract. The position under various GCC laws, however, is different and parties may obtain relief even in the absence of a force majeure clause in their contract. This article focuses on construction contracts subject to the laws of KSA or the UAE.

What if the works cannot continue at all?

If it becomes impossible to perform obligations due to a force majeure event, both the KSA Civil Transactions Law and the UAE Civil Code provide for the termination of the contract. The UAE Civil Code refers expressly to a supervening “force majeure” (Article 273 in the current Civil Code, and Article 236 in the new iteration of the Civil Code due to come into effect on 1 June 2026), whereas the KSA Civil Transactions Law refers to “a reason beyond the control of the debtor” (Article 110).

The UAE and KSA provisions are likely to be interpreted similarly and equally strictly. For this reason, it is important to carefully consider the circumstances before jumping to any conclusions about potential termination of a contract.

Under UAE law, a force majeure event must have been unforeseeable at the time of entering the contract and its effects must be unavoidable. While not insurmountable, these criteria are not always easily satisfied. Particularly in situations where contracts were signed at the time when the current hostilities are ongoing. While a lot of the impact is already felt, the foreseeable ‘butterfly effect’ on commodities and price escalation may disqualify a party from claiming force majeure.

In addition, even if those criteria are satisfied, reasonable efforts must be made to mitigate the situation. Performance must be objectively impossible rather than inconvenient (or even extremely difficult). A necessity to reprogramme works to account for labour or materials shortages or an increase in costs (even if considerable) is unlikely to meet the test.

Furthermore, the force majeure event must be the direct cause of the impossibility, which will not necessarily be clear cut. Say that a key item of plant is destroyed, rendering performance impossible. If the destruction was directly caused by an act of war, the position might be straightforward. However, what if the destruction (or theft) was caused at a site where cargo was re-routed due to the closure of the Strait of Hormuz? Was this caused by the hostilities directly?

Courts or arbitral tribunals are unlikely to find that a force majeure event is the direct cause if a party’s negligence is also at play. If parties are not aligned on the desire to terminate then there is fertile ground for a dispute. It will be particularly interesting to see whether contractors (rather than the project owners) will attempt to exit.

Given the onerous obligations under fixed price contracts, it is quite possible that it will be more beneficial for a contractor to terminate than continue. Of course, the ability to terminate may provide leverage to renegotiate the obligations in an inflationary environment. Given the consequences of wrongful termination, parties should give serious consideration (from a commercial and legal viewpoint) whether the circumstances warrant such an action.

What if the works can go ahead in part, or are expected to resume in time?

The force majeure provisions in both KSA and UAE law cover the scenario where performance is rendered partially impossible. Both KSA and UAE law allow for the relevant obligations to be extinguished, effectively de-scoping certain work.

A project owner may not wish to accept this approach and may demand the full termination of the contract via court petition. The KSA Civil Transactions Law allows the court to dismiss such petition, if the impossible part of the works is “of little significance” (Article 110(2)), whereas the UAE Civil Code includes no such caveat.

The works can proceed but will take longer and/or cost more. Who pays?

Force majeure provisions under KSA and UAE law will be of little help when considering payment for ongoing works. A party will generally need to look to its contract to consider whether it allows for the recovery of costs.

For example, under the 1999 FIDIC Red Book, war or hostilities (amongst other events) are force majeure events which may give rise to payment of costs provided that strict notification (and other) requirements are met (Clause 19). If that clause is not available (e.g. if an amended version of the Red Book is used), then other provisions might assist:

War and hostilities (amongst other events) are Employer’s Risk events for which contractors are entitled to additional costs and time if they result in “loss or damage to the Works, Goods or Contractor’s Documents” (Clause 17.4).
A Variation may be instructed if a change to the scope of works is required (Clause 13). This may provide a practical route forward if the Employer is willing to engage.

The FIDIC suite includes an optional clause, which provides for automatic adjustment to the Contract Price in line with specified cost indices. On a project impacted by the significant ongoing disruption to shipping, if such a clause is available it may provide a contractor with welcome relief.

In practice, many of the contracts in the Middle East, in particular Lump Sum EPC contracts, will not have a price escalation clause. In such instances, both KSA and UAE law may provide some relief via their hardship provisions.

Under the KSA Civil Transactions Law, if an unforeseeable extraordinary circumstance results in performance becoming oppressive and liable to cause “exorbitant loss“, the debtor may invite the other party to negotiate (Article 97). Failing agreement, the court may reduce the oppressive obligation to a reasonable level.

Furthermore, for ‘Muqawala’ contracts (which are contracts for works, including construction contracts), if unforeseeable exceptional circumstances destroy the “contractual balance” between the parties, the court may “order the restoration of the contractual balance, including the extension of the period of performance, the increase or decrease of remuneration, or the termination of the contract” (Article 471(3)).

The current UAE Civil Code hardship provision refers to “exceptional and unpredictable circumstances” which become “excessively onerous” and threaten “exorbitant loss“, and allows the court to reduce the excessive obligation “to reasonable limits” (Article 249). Under the new UAE Civil Code, in addition to the ability to reduce the obligation the court will have the power to order rescission of the contract (Article 224).

What amounts to “excessively onerous” or “burdensome”, and what constitutes “exorbitant loss”, will be entirely fact dependent and at the discretion of the judges or arbitrators. A very significant increase in prices might qualify but, if the relevant market is typically volatile, a change in price may not be extraordinary and/or unforeseeable.

These provisions (in both KSA and the UAE) cannot be contracted out of. However, if your contract expressly allocates risk for the type of event in question (which is rare), the court or arbitral tribunal is unlikely to interfere with that allocation.

Practical project (and dispute) management

The rapidly developing situation in the Middle East (and globally) will undoubtedly cause headaches for stakeholders and supply chains on many projects. While projects in the Middle East are most likely to be directly affected, ongoing disruption to global shipping routes and corresponding price escalation will be felt across the world.

Open and sensible communication between parties will reap rewards. However, to engage confidently, a party must know where it stands legally and contractually. To paraphrase Al Capone, you can get further with a request and legal leverage than with just a request.

Given the potential for disputes, parties should take particular care to follow contractual mechanisms. In particular, any required notices should be issued in time and in compliance with the requisite formalities. For example, on a 1999 FIDIC Red Book Contract contractors should be particularly mindful of:

the requirement to give notice within 14 days after becoming aware (or from when they should have become aware) of the relevant force majeure event (Sub-Clause 19.2);
the need to give “prompt” notice if any of the Employer’s Risks cause loss or damage to the Works, Goods or Contractor’s Documents (Sub-Clause 17.4); and
the applicability of the 28-day time bar for any claims for an extension of time or additional payment (Sub-Clause 20.1).

Bespoke EPC contracts may also provide for additional requirements and parties should pay careful attention to their contractual language. While force majeure provisions are typically seen as ‘boilerplate’ during negotiations, the effects can be unforgiving. We have seen an increasing number of contracts which require Force Majeure to have a preventative (rather than merely delaying) impact.

Finally, contemporaneous documentation is key in any dispute or claim. A party asserting force majeure (or disagreeing with such assertion) should record the specific reasons for its position. It is also very important to document any mitigation efforts attempted and the relevant costs (if any).

HFW can advise on specific contracts and circumstances to help stakeholders navigate the uncertainty caused by the current hostilities in the Middle East. Get in touch with us if you need assistance.