The ongoing conflict in the Middle East, involving the United States, Israel, and Iran, is causing a lot of uncertainty for businesses and governments around the world. No company or organisation is safe from the effects of this conflict, no matter where they are located or how big they are. When one of these countries makes an announcement, it can have a significant impact on markets, investments, supply chains, and businesses in general. For example, when it was announced that the Strait of Hormuz was open or that sanctions on a particular country were being lifted, the positive effects were felt in the financial markets, at the fuel pumps, and even in local grocery stores. On the other hand, when there were announcements of blockades or closures, markets reacted quickly, amid fears of a long, bloody war and further disruptions to energy markets. The situation is very fluid, and this makes it harder for lawyers to do their jobs. Lawyers have to advise their clients on whether they can still fulfil contracts, move money around, ship goods, get financing, and avoid breaching any compliance rules, especially when the company operates in multiple countries. Due to this, lawyers need to be able to give advice that is current and relevant, and that must be given in the light of the changing sanctions landscape. There are many issues that lawyers need to consider, but this article will focus on four key areas that need urgent attention: reviewing contracts, choosing the right governing law, giving advice on sanctions, and providing notice, evidence, and mitigation.

Contract Review

Now more than ever, lawyers need to carefully review all their clients’ contracts, including any side letters, standard terms, and financing documents.  Clauses such as force majeure, hardship provisions, changes in law, and material adverse change must be reviewed. There is also the need to look at extension of time mechanisms, termination rights, limitation of liability clauses, and insurance notification obligations. This is especially important for companies working in frontier and emerging markets, where contract management can be weak, and it is hard to keep track of everything. Sometimes, when there is a conflict, the other party might think they do not have to fulfil their obligations because of a force majeure clause. But this is not always the case. If the clause does not specifically mention war or conflict, the party might not be able to use it as an excuse. It becomes crucial to carefully analyse the wording of the clauses, the governing laws, and other factors such as causation, embargoes, and sanctions to determine if a party can really claim relief under force majeure. In many cases, the contract administration ecosystem is disjointed, and audit trails are missing, which can make it difficult to determine what really happened. Counterparties in conflict situations often assume that performance is excused by relying on force majeure clauses, but this assumption can be too simplistic. The wording of the clause, the governing laws, and other factors all play a role in determining whether relief exists under force majeure. By carefully reviewing all the contracts and analysing these factors, lawyers can help their clients navigate these complex situations and make informed decisions. It is not just about checking the contracts; it is also about understanding the market, context, and potential risks. Companies working in frontier and emerging markets need to be aware of the potential pitfalls and take steps to mitigate them. This might involve working closely with local lawyers and experts to understand the governing laws and regulations, as well as developing strategies to manage risk and ensure compliance. By taking a proactive and thorough approach, companies can protect themselves and their interests, even in uncertain and rapidly changing environments. Ultimately, the key to success lies in careful planning, thorough analysis, and a deep understanding of the contracts and the context in which they operate. By working closely with experienced lawyers and experts, companies can navigate even the most complex and challenging situations and come out stronger on the other side. When clauses require performance to be ‘prevented’, it imposes a materially higher threshold than one which requires obligations to be ‘hindered’ or ‘delayed’. Typically, a contract can be prevented from performance if it becomes physically or legally impossible to perform. The surrounding circumstances must be closer to the impossibility of performance. Similarly, when contract performance is hindered, it means performance is significantly hampered or made much more difficult or becomes uneconomic to deliver, though it may be technically possible to do so. Clients must be advised that, as a matter of English law, whether prevented, hindered or delayed will by themselves not be sufficient to rely on for force majeure, unless expressly stated in the contract. In the alternative, clients should be advised to consider frustration, but the bar may be extremely high. In order to rely on frustration, it requires that performance has completely changed from what was originally contemplated under the contract. The courts will be hesitant to allow a party to rely on frustration because of increased cost or commercial inconvenience. This means that many businesses may remain contractually bound despite material adverse trading conditions, creating pressure for renegotiations, delayed performance, and potential defaults. This situation creates a perfect storm for disputes, particularly in fixed price and low margin sectors, where counterparties will try to shift cost, risk, or financial burden away from themselves.

Governing Law

When it comes to contracts, breaches and compliance, the governing law clause is important because it decides which laws apply and which court handles any disputes. So, when advising a client, the first thing to figure out is not who is right or wrong, but rather which laws apply to the situation. This is crucial because different countries and regions have different approaches to the same issues, and the outcome of a dispute can depend on which laws are being used. This is especially important in international disputes, and even more so when there are sanctions and blockades involved that can change quickly. In some countries, like England and New York, the laws are based on common law, and the concept of force majeure is mostly determined by what is written in the contract. The courts in these countries tend to strictly apply what the contract says, even if carrying out the contract becomes difficult or expensive. On the other hand, countries like the UAE, Saudi Arabia, and France have civil law systems, where the courts can look beyond the contract and apply other laws that might give relief in ways that clients in common law countries would not expect. For example, in a dispute between two companies from different countries, the governing law clause could make all the difference. If the applicable law in the contract is English law, the courts might interpret the force majeure clause in a particular way, whereas if the applicable law is French law, the courts might interpret it differently. This can be confusing and unpredictable, especially for companies that are not used to dealing with international contracts. To navigate these complexities, it is essential to understand the governing law clause and how it can impact the outcome of a dispute. This requires careful consideration of the laws of different countries and how they might apply to a particular situation. By doing so, companies can better protect themselves and avoid surprises down the line. In conclusion, the governing law clause is a critical component of any contract, and its implications can be far-reaching. By understanding how this clause works and how different laws can apply, companies can make more informed decisions and avoid potential pitfalls in international disputes. Whether you are a business owner, a lawyer, or just someone interested in contracts, it is worth taking the time to learn more about this important topic.

Governing law and jurisdiction have assumed critical importance for businesses engaged in cross-border transactions, particularly in frontier and emerging markets operating within either common or civil law jurisdictions. It is commonplace for contracting parties, underlying assets, and enforcement risks to be spread across multiple jurisdictions. Legal advisers are therefore required to advise their clients not merely on what the clauses state, but how foreign governing laws interact with local public laws, exchange controls, import restrictions, etc. The current climate, therefore, requires commercially time-sensitive advice.

Sanction Advice is now Mainstream

 In today’s complex world, changes to sanctions or adding an entity to a sanctions list can have far-reaching consequences. The problem is that many counterparties may not even realise how these sanctions affect them. This is because commercial ecosystems are intricate, and companies often rely on indirect trade routes, unofficial market information, and layered distributor networks. As a result, a perfectly legal transaction can quickly become illegal. This is especially true for entities in emerging economies that are not fully integrated into the global economy. For lawyers, this means the risk landscape is constantly shifting, and it is no longer enough to just consider risks at the start of a commercial relationship. Instead, they need to think about how risks can evolve. To stay on top of things, legal advisers should provide ongoing guidance on screening, sanctions clauses in contracts, payment chain diligence, end-use and end-user risks, and shipping controls. This way, companies can navigate the complex web of sanctions and ensure they are always complying with the law. It is not just about checking boxes at the beginning of a relationship; it is about continuously monitoring and adapting to the changing risk landscape. By doing so, companies can minimise their risks and avoid unintended consequences. When you are drafting a contract together, you may consider it as a way to share risks between parties. This means considering terms which each side promises to be true, what they guarantee will happen, and what they have to keep doing to meet their obligations. You also need to consider what information they have to share, who gets to look at the books, when some terms can be put on hold, when they can be stopped altogether, and who pays if something goes wrong. If you are dealing with supply chains, lawyers should advise on how to prevent goods from being diverted, how to ensure products are routed correctly, and what restrictions there are on dealing with entities that are under sanctions.

Notice, Evidence and Mitigation

In this uncertain and fast-changing sanction environment, notice, evidence, and mitigation are where cases are won or lost. Liability, enforcement outcomes, and quantum will depend on what the client knew and what steps they took to mitigate any risk. Notice is key because it demonstrates knowledge, foreseeability, and helps the client to rely on its contractual rights. In most jurisdictions, breaches of financial sanctions are a strict liability offence, and the client’s defence hinges on what they knew, when and what steps were taken to mitigate the breach. For instance, in the UK, breaches of financial sanctions are a strict liability offence, meaning that the focus of authorities like the Office of Financial Sanctions Implementation (OFSI) is heavily placed on the evidence of what a client knew, when they knew it, and what actions they took to mitigate that breach. Since clients rely on lawyers for knowledge, consequences and advice, lawyers must constantly review the sanction environment to give prompt advice to their clients so that the necessary steps can be taken to protect themselves. Entities operating in frontier and some emerging economies are particularly vulnerable because the legal, regulatory, and evidential architecture or environment creates commercial risks linked to political and operational risks. The complex interconnectedness of supply chains in today’s globalised economy means that a single breach can cascade into widespread commercial, financial and reputation damage for lenders, insurers, and local agents. This is why entities operating in frontier and emerging markets especially require rapid, proactive and tailored legal advice.

Conclusion

The Middle East conflict continues to create uncertainties and risks for businesses and governments around the world. This requires legal advice to be more dynamic and robust. Lawyers need to be commercially aware and responsive to geopolitical changes, especially in frontier and emerging economies, where legal infrastructure may be unpredictable and commercial ecosystems are weak and more fragmented. The shifting sanctions regimes of different governments and market areas will surely lead to different interpretations of force majeure and governing laws across multiple jurisdictions. In addition, businesses, particularly those operating through complex supply chains, may be exposed to sanction risk as a result of dealing with counterparties within the supply chain who may or may not be aware that they have been sanctioned. Therefore, legal advisers must go beyond standard legal and compliance advice and instead adopt an integrated, continuous contract analysis, jurisdiction-sensitive advice, and commercially minded risk management.