Construction in the Crossfire: A Roadmap for GCC Projects Affected by the Regional Conflict

The regional conflict in the Gulf is, hopefully, at an end. It has nevertheless created pressure on many construction projects across the GCC due to multiple causes, including disruptions in or around the Strait of Hormuz, which delayed vessels, reduced shipping capacity, increased war-risk insurance, and raised fuel and freight costs. For construction projects, the consequences of the conflict may be severe: the crisis could have affected how and when materials reached site, the cost of those materials, labour supply, physical damage to sites themselves, and, ultimately, delays to the times for completion.

When dealing with such issues, whether issuing or assessing/defending such a claim, the right question to ask is not simply whether the events represent force majeure. The better approach is to carefully examine: (i) what the contract says as a whole (including regarding price escalation and supply chain risks), (ii) what the law applicable to the contract allows, and (iii) what evidence the project team can show to demonstrate a causal link between the conflict and its ability to perform its obligations. This article provides a four-step roadmap for addressing these challenges.

Step 1: Check your contract

The first port of call is invariably the contract itself.

Force Majeure

Force majeure clauses are intended to relieve parties from contractual obligations when extraordinary events beyond their control prevent performance. It is important to check whether the force majeure clause covers events such as war, armed conflict, hostilities, blockade, government action, or transport disruption. If it does, the effects of the conflict may fall within the clause.

But the wording of the entire force majeure clause matters. Many construction contracts only give relief if the force majeure event prevents performance¹, not if it only makes performance more difficult or expensive. As such, a late shipment or higher freight charge does not automatically amount to force majeure.

Under most contracts, the party claiming relief should: (i) identify which contractual obligation cannot be fulfilled, (ii) demonstrate why performance has become impossible (not merely more difficult or expensive, unless the force majeure clause covers hindrance to the fulfilment of obligations), (iii) establish a direct causal link between the force majeure event and the inability to perform, (iv) provide contemporaneous evidence of genuine efforts to fulfil the obligation despite the disruption, and (v) identify what steps it took in mitigation.

Price Escalation

Price escalation clauses allow contract price adjustments based on changes in material, labour, or fuel costs, typically linked to published indices. Check whether the contract allows price adjustment. Does it deal with changes in the cost of steel, fuel, labour, shipping, or insurance? Is there a formula, an index, a threshold, or a cap? If so, the party seeking relief may be entitled to recover increased costs to the extent permitted by the contractual mechanism.

It is worth noting that many construction contracts in the GCC are lump-sum contracts and, absent express provisions, these contracts generally do not permit cost increases. That matters in the present crisis because higher oil and gas prices, rerouting, and supplier shortages can all raise procurement costs even where delivery remains possible. If the contract does not clearly allow recovery, a claim for extra payment will be difficult under a lump-sum contract alone. In these cases, contractors will need to look to the statutory exceptional circumstances regime for relief (see Step 2 below).

Supply Chain Risk

The contract should also be checked for delivery dates, procurement obligations, notice periods, suspension rights, and any duty to use alternative suppliers or routes. These provisions define when a delay becomes actionable, what steps must be taken to preserve contractual rights, and whether the contractor has flexibility to source materials elsewhere.

For GCC projects, the most exposed items are typically imported materials and specialist equipment. The more critical the item, the more important it is to map when it was due, where it was coming from, and how the crisis affected that route or supplier.

Damage to the Works

Some building sites will have suffered physical damage due to the conflict. Construction contracts commonly require the contractor, if requested by the engineer or the employer, to rectify damage to the works arising from “war” or “hostilities”. Where such rectification is carried out, the contractor is typically entitled to claim the associated costs as well as an extension to the time for completion, provided the remedial works themselves give rise to critical delay. This position is reflected, for example, in Sub-Clause 17.4 of the FIDIC Red Book (1999).

Employers need to check their insurance policies for coverage and ensure timely notices of any claims are lodged.

Step 2: Check if relief is available under the applicable law

The civil codes of the UAE², KSA³, Qatar⁴, and Bahrain⁵ provide potential grounds for relief where “exceptional circumstances” render performance of the contract significantly more onerous — even if not impossible — provided these threaten the obligor with “exorbitant”⁶ loss. These statutory provisions are mandatory, meaning they apply regardless of the terms of the contract.

This type of relief can be more useful than force majeure where the real problem is not total inability to perform but serious cost escalation or supply chain disruption. For instance, in the event of an important spike in the cost of materials caused by the crisis, it may allow for a partial adjustment to the contract price even where the contract was entered into on a lump-sum basis. In the event of supply chain disruptions, it may also allow the contractor an extension to the time for completion and additional costs.

However, the existence of such a provision does not mean every increase in cost will justify relief. The party seeking relief must show that the circumstances in question: (i) are of a “public nature” or “general” character (i.e., affecting wider society, not merely the obligor), (ii) are “unforeseen”, and (iii) threaten “exorbitant” loss (i.e., the threshold for loss is high, and moderate or small losses will likely not trigger relief). The last requirement will merit viewing any increased costs in the context of the overall contract price and contract duration — a short-term cost spike may not be sufficient to trigger such protection.

Moreover, if such a claim is asserted, the employer may be justified in requiring the contractor to open up its books for examination to ascertain if the contractor has in fact incurred losses of the magnitude claimed.

Step 3: Has causation been established and documented?

The mere existence of the conflict is insufficient. Whether claiming under contract or at law, a party must demonstrate a direct causal link between the conflict and its inability — or increased burden — to perform. If the conflict has disrupted shipping routes, triggered sanctions affecting suppliers, or caused price escalation, it will be important to document this meticulously. This is because the burden of proof lies with the party claiming relief and courts and tribunals will not be satisfied with generalised assertions that fail to demonstrate how the specific event directly caused the specific harm claimed.

Step 4: Has notice been given and have mitigation efforts been undertaken?

Force majeure or price escalation clauses may impose strict notice requirements. While failure to comply strictly with these requirements may not always extinguish a party’s substantive rights, it is important to be aware of when notice is necessary under the contract and timely comply with any such requirement.

Relief under the statutory exceptional circumstances regime is not expressly conditional on notice under UAE Civil Code, Article 249, Qatari Civil Code, Article 171, or Bahraini Civil Code, Article 130, but delay in giving notice is likely to be viewed unfavourably by the courts. By contrast, KSA Civil Code, Article 97 makes notification a prerequisite, and a party may seek court intervention only after a claim is properly notified and subsequent negotiations have failed.

Mitigation is also important. Parties should also be prepared to demonstrate efforts to mitigate, such as exploring alternative suppliers or routes, as courts and tribunals will look more favourably on parties who can show they made genuine efforts to perform despite the disruption.

Conclusion

It may be too early to ascertain the full impact that the conflict has had on construction projects, but employers, contractors and others in the supply chain need to be aware of the core principles that will apply to the assessment of these types of claims.

¹Under the FIDIC Red Book (1999 Edition), Sub-Clause 19.4, for instance, relief is available only where the contractor “is prevented from performing any of his obligations under the Contract by Force Majeure.”

²Federal Law No. 5 of 1985 on the Civil Transactions Law of the United Arab Emirates, as amended (the “UAE Civil Code”).

³Royal Decree No. M/191 dated 29/11/1444H promulgating the Civil Transactions Law (the “KSA Civil Code”).

⁴Law No. 22 of 2004 promulgating the Civil Code (the “Qatar Civil Code”).

⁵Decree-Law No. 19 of 2001 On the Issuance of the Civil Law, as amended (the “Bahrain Civil Code”).

⁶See UAE Civil Code, Article 249; KSA Civil Code, Article 97; Qatar Civil Code, Article 171; and Bahrain Civil Code, Article 130.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.