The Geopolitical Conflict and Contractual Risk Allocation: Force Majeure and Hardship in the Context of the US–Iran Crisis

I. Overview

Escalating geopolitical tensions in the Gulf, and their sweeping economic effects worldwide, particularly those affecting critical trade routes such as the Strait of Hormuz, are no longer confined to military or political spheres. Their economic effects are materially disrupting supply chains, inflating costs, and delaying performance across a wide range of contracts, especially in construction and energy-related sectors.
Against this backdrop, parties are increasingly assessing whether such disruptions excuse or adjust contractual obligations. Under Gulf civil law systems (largely influenced by Egyptian law), including Saudi Arabia, the UAE, Qatar, Kuwait, Oman and Bahrain, two doctrines provide the primary legal framework: force majeure and hardship (unforeseen circumstances). While often conflated, they operate differently and lead to distinct legal consequences.
This alert outlines the key distinctions, conditions, and practical implications for businesses operating in or contracting under the different laws of the above Gulf countries.

A. Core Principle

Force majeure applies where an exceptional external event renders contractual performance objectively impossible, not merely difficult or costly.

B. Key Conditions

Gulf laws and courts across Gulf jurisdictions consistently require that the event:

Is unforeseeable at the time of contracting (assessed objectively against a reasonable person standard);
Is unavoidable and irresistible, meaning it could not be prevented even with reasonable efforts;
Occurs after contract formation and before performance; and
Directly causes impossibility of performance.

Importantly, the threshold is high. Economic hardship alone does not suffice. Courts have repeatedly rejected force majeure claims where performance remained possible, even if commercially impractical.
Based on practice of Egyptian and Gulf Courts, examples of events that might constitute force majeure include closure of critical shipping routes preventing delivery obligations; government actions (e.g., embargoes, seizures) making performance illegal; and destruction of the subject matter of the contract. In all these cases, the above conditions must exist to invoke force majeure under the law. They are tested on a case by case basis.
By contrast, courts have rejected force majeure claims based merely on increased costs due to war or inflation; financial inability to perform; or market volatility, where those events merely made performance burdensome without being impossible.

C. Legal Consequences

Where the existence of force majeure is established, the affected obligation is extinguished if impossibility is permanent. If impossibility is only temporary, performance is suspended until the event and its effects cease to exist. The obligation would be extinguished or suspended without liability or damages, since the assumption is that the obligor did not commit a fault.
Furthermore, in case an obligation becomes impossible and is extinguished because of a force majeure, reciprocal obligations are also extinguished, often leading to automatic termination by force of law.
However, parties may contractually allocate force majeure risk differently, including requiring one party to bear such risks, effectively acting as an insurer.

A. Core Principle

The hardship doctrine applies where performance remains possible but becomes excessively onerous, threatening the debtor with substantial loss and disrupting the contract’s economic balance.

B. Key Conditions

Thus, hardship does not require impossibility, unlike force majeure. Rather, it is sufficient that there exists a severe imbalance in the contractual equilibrium as a result of the performance being excessively burdensome beyond normal commercial loss.

C. Typical Triggers

A number of events might potentially lead to the application of the hardship doctrine if the above conditions are fulfilled. Examples include sharp increases in material or transportation costs; supply chain disruptions affecting entire sectors; and regional conflicts impacting market conditions.
However, ordinary commercial losses or reduced profitability are insufficient. Courts require exceptional and substantial loss.
Furthermore, under Gulf civil codes, contractors in lump-sum agreements generally cannot claim price increases, even if costs rise. The hardship doctrine operates as a narrow exception where unforeseen events fundamentally disrupt the contract’s financial equilibrium.

D. Legal Consequences

Courts retain broad discretion as to the consequences of hardship, depending on the circumstances of the case at hand. The court may reduce the debtor’s obligation to a reasonable level. It may also increase the counterparty’s obligation. Further, it may suspend performance of the affected obligation temporarily until the effect of the event ceases to exist. In extreme cases, the court may decide termination of the contract.
Any contractual provision excluding hardship relief is typically unenforceable, as the doctrine is considered as a public policy rule according to Gulf laws.

The dividing line between force majeure and hardship is that while in force majeure performance is absolutely impossible, and thus the obligation extinguishes, in hardship performance is still possible but excessively burdensome, and thus the obligation is merely adjusted.
Mischaracterizing a situation can lead to failed claims. Courts in the region have shown a consistent reluctance to expand force majeure beyond strict impossibility. Further, they were also reluctant to apply the hardship doctrine in case the effect of the event was merely within normal business risks.

Review governing law and contract terms carefully. The availability and scope of relief depend heavily on both.
Do not assume economic disruption qualifies as force majeure
The threshold is significantly higher than commercial hardship.
Document causation and mitigation efforts: Parties must demonstrate that the event directly caused the disruption and that reasonable steps were taken to mitigate its impact.
Consider proactive renegotiation. In hardship scenarios, courts favor rebalancing rather than termination.
Draft with precision going forward. Clear force majeure clauses and risk allocation mechanisms are critical in volatile geopolitical environments.

As geopolitical instability continues to reshape economic conditions in the Gulf and worldwide, the distinction between force majeure and hardship has become increasingly consequential. While both doctrines offer relief, they apply in fundamentally different circumstances and produce markedly different outcomes.
A careful, fact-specific legal assessment is essential before invoking either doctrine. Missteps can convert a defensible position into a breach.

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