War in the Middle East Time to Review Your Company’s Force Majeure Clauses

S. George Alfonso

Summary:

This article outlines key issues facing U.S. and international businesses arising from the Israeli/U.S. war against Iran and its regional proxies, which has expanded into a broader Gulf conflict. It also highlights the potential relief available through the invocation of contractual force majeure clauses, where applicable.

The Iran War Effects Far More than the Energy Supply Chain:

The Israeli/U.S. launch of “Operation Epic Fury” on February 28 initially concentrated risk on the Strait of Hormuz and the global energy supply chain. Iran’s rapid response—via drone and missile attacks—effectively shut down the Strait by triggering the withdrawal of insurance coverage for tankers entering or exiting the Persian Gulf.

This disruption amounts to a de facto embargo on roughly 20% of the world’s transported oil. However, the consequences extend far beyond fuel markets. Petroleum-based inputs are essential to manufacturing plastics, textiles, cosmetics, and construction materials, while diesel fuels global logistics. As a result, the interruption of this supply chain is likely to render performance under countless commercial contracts as impracticable or even impossible worldwide.

Force Majeure Clause:

Force majeure clauses (often called “Act of God” clauses) are standard in commercial contracts and may excuse performance for at least an amount of time (if not completely release the party from contractual obligations), when extraordinary events beyond a party’s control occur. These typically include both natural and human-made disruptions.

To successfully invoke such a clause, the triggering event must make contractual performance impracticable, impossible, or illegal—at least temporarily. Depending on the contract’s terms, prolonged disruption may excuse performance in whole or in part.

• Acts of Nature: Natural events like hurricanes, tsunamis, tidal waves or pandemics.
• Acts of Man: Human-made events such as war, terrorist attacks, strikes, or tariffs.

Key Limitations and Risks Regarding Force Majeure Clause:

When in doubt, read the directions.  The specific Force Majeure language in the commercial contract will control in every instance but only insofar as that language is well drafted and clear, without ambiguities or inconsistencies.  Common issues include:

• Notice Requirements:
• Most Force Majeure Clauses will require the party to specifically cite and to some degree timely identify the triggering event(s) which rendered contractual compliance to be impracticable, impossible, or illegal at that time.
• Some Force Majeure clauses impose a strict “use-it-or-lose-it” notice provisions requiring timely written notification after a triggering event. Failure to comply may waive the right to invoke the clause.

• Scope of Covered Events:
• The triggering event must either be explicitly listed or fall within a valid catch-all provision. Ambiguity increases the risk of dispute.

Immediate Steps to Undertake:

After more than a month of sustained conflict in the Gulf, businesses should take undertake the following proactive steps in order to better prepare for potential disruptions and minimize the financial risks associated with this unpredictable regional conflict.

1.         Review Existing Commercial Contracts and their Respective Force Majeure Clauses: 

Identify the Force Majeure Clause in each commercial contract and assess whether current conditions may qualify and justify the invocation of the Clause under the specific terms of each commercial contract. 

            2.         Update Clauses for Future Contracts:

When negotiating new contracts, consider the new risks and evolving geo-political realities to include in the language of the Force Majeure Clause.

3.         Renegotiate Existing Contracts: If possible, businesses should explore renegotiating existing contracts to modify the Force Majeure clause, making sure it covers potential new tariffs.

Strategic Decisions and Potential Leverage in the Mere Threat to Invoke the Clause:

Invoking force majeure carries inherent litigation risk. In some cases, the credible threat of invocation may provide sufficient leverage to renegotiate terms without the need to actually trigger the Clause itself and thereby avoid potentially costly and long formal disputes in litigation or arbitration. A careful, contract-specific analysis is essential before taking action.

Conclusion:

The widening Middle East conflict has far-reaching commercial implications well beyond the energy sector. Businesses should immediately review their contractual obligations to determine whether force majeure relief is available and advisable.

Proactive contract review—and, where necessary, revision through potential re-negotiations – will better position companies to manage risk, maintain flexibility, and protect against ongoing and future disruptions. to Review Your Company’s Force Majeure Clauses