Conflict in the Middle East – legal solutions to help build business resilience

The conflict between the US-Israel and Iran, along with retaliatory attacks affecting nearly a dozen countries, has led to dramatic disruptions across multiple fronts - financial, operational and geopolitical - throwing supply chain risks into stark focus.  Maritime insecurity in the Strait of Hormuz (through which 20% of global oil passes), repeated drone attacks on oil and gas infrastructure, and the closure or limited operation of key airports (e.g. Dubai) have all profoundly disrupted supply chains, with businesses facing not only logistical delays but rapidly escalating costs – soaring oil and LNG prices, freights costs, insurance premiums, inflation and interest rates. 

A central question for many businesses is whether their contracts provide relief where their performance is prevented or delayed due to circumstances they consider to be outside of their control.  The current conflict is the latest in a succession of global events that has brought force majeure clauses under intense scrutiny - Brexit, the Covid-19 pandemic, the extensive supply chain disruption caused by Russia's invasion of Ukraine, and the escalation of sanctions and tariffs.

However, these events have taught us that force majeure clauses do not always come to the rescue.

• Proper documentation and maintaining a clear audit trail (delays, shutdown notices, port advisories) are vital to support both causation and mitigation.
  
  
• It is also important to adhere to notice requirements as force majeure provisions frequently require prompt, formal notice - sometimes with strict deadlines. Missing notice requirements can invalidate claims.
  
  
• Finally, it's important to be aware that invoking force majeure can trigger counterparty rights, such as termination, suspension of obligations, loss of exclusivity, or disaster recovery measures, so the broader commercial implications of triggering these clauses must be carefully evaluated.
  
  
• Proactive, open and constructive dialogue with customers and suppliers is essential at this time.

See this briefing for a further discussion on force majeure clauses.

Check your contracts for MAC provisions which might entitle your business to renegotiate or terminate in light of the conflict. Typically, MAC provisions might kick in if substantial and enduring changes fundamentally alter commercial circumstances or make performance uneconomical.

As a general rule, we would expect the threshold for engagement of a MAC clause to be somewhat lower level than is the case for force majeure (see above). However, the approach the courts take to them will always depend on how they are drafted. The English courts interpret MAC clauses narrowly, and they generally apply only to sustained, party-specific hardship. Carve-outs for market-wide events are common, meaning industry-wide volatility or geopolitical disruptions may not trigger relief unless explicitly contemplated

The turbulence from the Middle East conflict will increase businesses' exposure to both regulatory and disputes-related risks.

Rapidly evolving sanctions regimes, as well as the challenge of complying with regulatory frameworks during periods of disruption (for example, sustainability-related due diligence) will present a headache for organisations over the coming period.  They should expect close regulatory and stakeholder scrutiny of how they respond to events as this crisis unfolds.  In addition, businesses might find themselves having to issue – or, alternatively, facing – disputes centred on key contractual provisions in their most important contracts (force majeure, MAC, and termination clauses, to highlight some of the most critical, which are explored in further detail in this briefing).  Disputes relating to insurance cover and – if there is severe market disruption – hedging or derivatives-related claims, might also emerge, although much will depend on the severity and duration of the conflict, and the extent to which it impacts global markets.

These types of legal risk might well be expected given current events.  However, businesses should also be aware that, over recent years, some jurisdictions, including the UK, have seen increasingly novel claims which aim to test the boundaries of liability across corporate groups and value chains.  This has been most prevalent in the ESG space, underlining the points made elsewhere in this briefing about the importance of complying with due diligence and transparency requirements if supply chain diversification is required in response to the current crisis.  But, more generally, businesses will be well advised to tread carefully in how they communicate publicly and to the market about the impact of the crisis on them, given that large and innovative collective action claims are on the rise.   For example, if public statements or market behaviour are perceived as underplaying exposure to the Middle Eastern conflict, directors and officers could face litigation by shareholders for alleged failures of governance or disclosure. Proactive engagement with these risks—for example, through well-developed governance protocols which are followed even during periods of uncertainty and pressure, and well-rehearsed crisis management protocols — may help reduce exposure to regulatory and litigation risk at a time when events are ever more difficult to predict.

Supply chain diversification makes sense in the current crisis but it can be a double-edged sword in the current regulatory environment. Sustainability regulation, in particular, aims to shine a light deep into supply chains. Compliance with active due diligence and transparency requirements for specific sectors and horizontally will require a good understanding of actors in the supply chain well beyond those with whom you have a direct contractual relationship. The more diverse the supply chain, the higher the burden and potential risk profile.

Also bear in mind that engaging with suppliers in jurisdictions with more acute environmental or human rights risks may result in higher diligence and mitigation expectations.

Economic volatility, surging logistics costs and market disruption heighten the risk of insolvency and late payment throughout supply chains, threatening business continuity. Here are some proactive steps your business can take to mitigate financial risk in the supply chain.

The UK’s National Cyber Security Centre (NCSC) has urged increased vigilance, noting that organisations should prepare for the risk of collateral damage from Iran-linked hacktivists.  Here are some key strategies for mitigating cyber-security risk in your supply chain:

• Map your supply chain: Identify direct and indirect suppliers, their access to data and systems, and their criticality to business operations, especially where operations may be impacted by regional cyber threats or geopolitical instability.
  
  
• Due diligence and regular monitoring: Evaluate supplier cyber resilience, require evidence of independent certification (e.g., ISO 27001), and ensure all staff are trained in cyber risk and incident response protocols.
  
  
• Contractual safeguards: Build minimum security standards, incident reporting requirements, and disaster recovery plans into all supply contracts. Include clear audit and oversight provisions.
  
  
• Board-level priority: Treat supply chain cyber threats as urgent strategic risks, not mere compliance issues, with regular attention at the highest levels of corporate governance.
  
  
• Regulatory environment: Be alert to expanded notification obligations and heightened oversight, as authorities respond to elevated cyber risk arising from geopolitical crisis.

For more on this topic, see our briefing on cyber risks in supply chains

The conflict is already driving rapid sanctions changes with broad compliance implications. Risks extend beyond direct counterparties to supply chains, logistics networks, and intermediaries. Dual-use and defence product manufacturers face heightened exposure as constrained supply chains create opportunities for bad actors.

• Be aware of the risks involved in the indirect/re-export of sensitive goods and technologies to conflict zones risk (see UK trade sanctions), especially given the enhanced UK OFSI enforcement powers and notable recent sanctions cases highlighted in our UK Sanctions Update.
  
  
• Businesses should proactively conduct risk assessments, screen counterparties, monitor regulatory updates, and review export control classifications. Well-drafted contract clauses enabling suspension or termination are essential. 

Volatile oil and gas markets will redouble calls for stable, domestic energy sources. Whilst current economic instability may complicate supply chains and restrict access to finance for new projects, existing renewable projects will benefit from higher electricity prices (with UK prices being pegged to gas) and longer term, renewables will reduce exposure to energy supply disruption and price volatility.

The Chancellor's commitment to a single fiscal event is welcome in a stable and predictable world, but faced with geopolitical reality, the Treasury must now balance twin imperatives of continuing to provide stability for economic growth and reacting decisively to economic shocks (including, where appropriate, on tax). 

The conflict increases economic pressure on the government's plans and fiscal rules. The OBR suggests that inflation will nudge closer to 3% than the 2% forecast at the Spring Statement – extenuating the effect of 'fiscal drag' – while the yield on UK 10-year Gilts has spiked, materially increasing the cost of government borrowing. On the spending side, calls for greater expenditure on defence and pressure to protect households from rising energy bills are likely to intensify. This is likely to have a direct impact on energy taxation, with plans to unwind the 5p cut on fuel duty and transition away from the Energy Profits Levy to a new Oil & Gas Price Mechanism now in doubt. 

With greater external pressure on the economy comes greater risk of fiscal policy volatility. Businesses need to plan accordingly, with agility and flexibility.

Employers have a duty to protect the safety and welfare of staff, regardless of where they are working, and should follow closely the guidance issued by the Foreign, Commonwealth and Development Office and relevant local embassies. Beyond physical safety, don't underestimate the emotional toll that a regional conflict can take, both on those working in close proximity and on colleagues following events from afar. Consider proactive communications to reassure staff and signpost support available, such as Employee Assistance Programmes, mental health resources or designated points of contact within HR.  

The hard lessons of the Brexit and Covid-19 crises, which exposed the inherent vulnerabilities of just-in-time logistics, spurred a strategic rethink by many businesses. Some investigated reshoring all or part of their supply chains, aiming to regain control and reduce cross-border risks. However, bringing production back home is complex and costly: localising manufacturing can strain domestic capacity and drive up costs, and may not eliminate exposure to imported raw materials or international markets. For others, the solution lies in diversification - building a network of suppliers in multiple jurisdictions to spread the risk, even though this adds complexity to procurement and quality assurance.

Experience shows that there is no one-size-fits-all solution to geopolitical upheaval.  Contractual tools such as force majeure offer important protection – if well drafted and where the requirements are strictly observed.  But agile operational strategies are critical too – organisations that map supply chain dependencies, develop contingency plans, keep careful records and learn from each disruption find themselves in a far stronger position to respond when crisis hits.

Equally important to weathering turbulent periods is proactive, constructive engagement with suppliers and customers. Flexibility - whether through amending delivery timelines, negotiating temporary arrangements, or sharing the costs of disruption (while taking care not to waive legal rights) can preserve business relationships and keep supply chains moving, even if imperfectly. This dual approach - contractual rigour paired with commercial and operational adaptability - is now essential not just to riding out the storm, but to building supply chains that are more resilient in the face of future crises.

If you'd like more advice on any of these issues, get in touch with any of the contacts below, or your usual contact.