Geopolitical risk: future-proofing your construction contracts

The Middle East's construction sector faces familiar fault lines amid ongoing regional tensions: delays in logistics, labour shortages, and regulatory changes, much like the Covid pandemic, but now amplified by sanctions and wider geopolitical risks.

Parties who learned from past disputes - where weak contractual notices and a lack of causation evidence defeated otherwise strong claims - have fewer excuses for repeating the same mistakes again.

Forward-thinking stakeholders will be taking the opportunity to review contracts, sharpen their record keeping, and foster collaboration. Doing so now can help turn volatility into managed risk rather than another sustained period of arbitrated disputes.

Lessons learned from Covid 

During the Covid era, projects across the UAE, KSA and Qatar generated significant claims, with extensions of time in the oil and gas sector alone averaging 462 days [HKA Crux Fifth Annual Insight Report: 2021 construction and engineering, according to HKA data]. Parties often pleaded force majeure or a change in law, but the UAE courts and tribunals have consistently required proof of ‘impossibility’, rather than mere hardship, and have dismissed generic "pandemic" pleas.

Disputes pivoted on concurrent delay, inadequate records, and issues of late (or no) notice.  These same issues seem likely to recur as a result of disruption to infrastructure and transport, tighter border controls, visa curbs, and site security mandates currently being experienced in the region.

These pressures test the same risk: was the event foreseeable? Does it trigger time, money, or both? In FIDIC-heavy markets, the answer hinges on precise drafting and real-time evidence.

Logistics and procurement: mitigating import disruptions 

Construction in the Middle East relies heavily on imported materials (e.g. steel, stone, equipment etc.), all of which are vulnerable to potential closures of the Strait of Hormuz and adjacent threats in the Red Sea. Certain sea carriers have already announced a reduction or suspension of services, with estimates suggesting this is adding 10-14 days to travel via the Cape of Good Hope, which itself introduces additional risk. Similarly, airfreight suspensions exacerbate flights, often for high-value items. Even if these materials can arrive in the Gulf in a timely manner, they are susceptible to delays via backlogs and reduced capacity at the port of entry.

Recent GCC initiatives offer mitigation lifelines. Oman, the UAE and Saudi Arabia have affirmed their readiness to transport goods via land routes to GCC markets, thus avoiding ships having to pass the Strait of Hormuz. Early reports suggest delays of 1-4 days versus those experienced from the intended shipping routes.

Required action 

Parties should be looking to contractually mandate contingencies with clear deliverables for evidence protocols; diversion costs, demurrage, and general mitigation costs.

It may also be prudent to identify potential GCC trucking partners sooner rather than later, assuming the disruption will become long term. Those slow to consider this will inevitably pay the price in quality and affordability. Parties should look to avoid arguments over whether any of this amounts to force majeure, the same arguments which bogged stakeholders down in disputes for years post 2020.

Reinforce contractual defences

Dispute avoidance starts with a proactive approach to contract management:

• Consider force majeure clauses and ascertain precisely what they expressly cover (e.g. sanctions, route closures, and embargoes).
• In civil law jurisdictions, where ‘impossibility’ remains the relevant legal test, consider building in hardship provisions for cost and identifying potential termination rights. 
• Distinguish clearly between time relief and cost recovery, as many Covid claims faltered in this regard. Although disruption may warrant extensions, rarely does it result in the recovery of prolongation costs (absent perhaps an ironclad case on causation).
• Consider the inclusion (via revision if necessary) of contractual provisions for logistical and security issues. Pre-empt requests for a ‘change’ in materials with a view to pre-empting ‘variation’ disputes.
• Similarly, consider now what ‘events’ require the submission of a notice, and whether an ‘umbrella’ notice will suffice or a new notice is required for each new ‘event’. 

The objective is to try and avoid the procedural traps that felled otherwise viable claims arising from the pandemic.

Evidence is your first line of defence

Every disputes lawyer will say that ‘evidence is king’; claims live or die on contemporaneous records.

Stakeholders should consider seeking agreement now on delay methodologies (i.e. time-impact analysis) with regular updates seeking to capture critical path shifts, resource histograms, and mitigation efforts. For supply chains strained by rerouting, consider keeping shipping logs, and documents evidencing efforts to source alternative materials.

Whilst this may seem like applying a counsel of perfection, the reality is that both the Courts and tribunals will be looking to see if stakeholders acted reasonably and proportionately. Maintaining records is the minimum amount of effort required to assist in passing this threshold.  

Collaboration over confrontation

Standing dispute boards, tuned for real-time extension of time and disruption issues, whilst often shunned for cost, may be one way to avoid long term disputes. Companies may wish to establish them now and empower them to resolve disputes fairly, thereby helping to avoid greater time and cost implications later.

Similarly, insurance should not be an afterthought. Review policies for political risk and trade interruption cover.  Where cover may be available, carefully consider the indemnity triggers and ensure compliance with notice obligations. Insurers will equally be concerned to see contemporaneous records.

Contracting parties who collaborated through the pandemic were better placed to refocus projects swiftly. Those who ignored the issues, or sought to actively pursue claims, found themselves in protracted and costly disputes.

Whilst current events might substantially increase the risk of disputes, if properly managed the effects could be mitigated, or they could be avoided all together.

In summary, review your drafting and, where appropriate, consider revising it by agreement now; brief internal teams on the importance of maintaining records, and look for collaborative solutions rather than problems.