Middle East conflict: Impact on construction & infrastructure projects

1. Force Majeure (FM): The extent to which Australian project contracts provide FM relief varies between sectors – construction contracts may include time relief for FM events and a pathway for suspension/termination in the event of prolonged FM. The latter provision is very common in project-financed renewables and infrastructure contracts but are less common in the development sector.  A typical FM clause:

• will include relief^[2] by reference to war, civil disturbance or insurrection; and
• may include a limb relating to sanctions.

However, such clauses do not generally provide cost relief.  A party seeking to rely on an FM clause to exit or terminate a contract, will need to ‘wait out’ the relevant period (usually somewhere between 3-6 months) and be able to demonstrate the ongoing impact.  Finally, there remains an open question about whether the conflict constitutes ‘war’ and whether a typical FM clause, which is often drafted so that its application is to intra-Australia impacts, would even apply in this scenario.

2. Change in law: a typical change in law clause will permit time and cost recovery in relation to a change in legislative requirement impacting on the works after the date of contract. At this stage, whilst there have not been any applicable changes in law which might give rise to any entitlement, Australian governments are discussing liquid‑fuel emergency measures, including rationing pathways under federal and state legislation albeit as a last-resort power. Further, wartime policy has generated customs/tariff adjustments in the past: Australia withdrew Most-Favoured-Nation tariff treatment for Russia and Belarus and imposed an additional 35% customs duty, which was subsequently extended to 24 October 2027, demonstrating that duty measures can be introduced and prolonged in response to conflict. Entitlement to relief in this context will turn on the scope of qualifying “legislative requirements”. Further, any changes in third‑country export or transit tariffs will not usually be captured unless expressly included.

3. Supply chain: contracts which contain a supply chain delay clause may be broad in application or limited to specified items or materials and/or specific shipping or transport routes. Whilst generally designed to capture post-COVID shipping and supply disruptions, these clauses may be wide enough to permit a contractor to claim relief in relation to the Middle Eastern conflict. These types of clauses are usually limited to delay relief, although for projects being delivered under cost-plus, Guaranteed Maximum Price or Not to Exceed pricing mechanisms where costs are not necessarily fixed, contractors will generally be able to claim any cost increases to both materials, labour and equipment as well as the contractor’s own overheads and preliminaries (subject to certain limited exceptions e.g. where the cost increase is due to the contractor’s default, such as not placing a procurement order on time).  

4. Provisional Sum Allowances: the current conflict is impacting on the cost of certain materials derived from oil by products. Depending on the scope of the provisional sum item, a contractor may seek to recover increased costs via this mechanism.

5. Frustration: depending on how long the conflict continues and its impact on the delivery of projects in Australia, the doctrine of frustration (which results in automatic discharge of the contract and each party bearing their own loss) may apply. However, frustration of a contract is difficult to establish. A party choosing to proceed down this path needs to:

• show that performance renders performance of the contract into something fundamentally different to that contemplated by the parties at the time of entry; greater difficulty, higher cost or delay typically does not suffice;
• pay careful attention to the impact of a negotiated FM clause (if any) on their rights to argue a contract has been frustrated at common law.

Where the contractual risk allocation deals with the supervening event or its consequences, frustration is unlikely to be found to have arisen, as the event (or its consequences) is taken to have been reasonably foreseeable by the parties.  Parties should also proceed with caution before seeking to terminate a contract on the basis it has been frustrated, as wrongful termination risks repudiation (which may have adverse cost consequences for the terminating party). 

Contracts Under Negotiation

As with all rapidly evolving geopolitical challenges, there is some guesswork associated with drafting for this scenario. In the short-term, we expect to see contractors reserving their position on price and program by reference to the current conflict when they submit tenders and bids.

At this stage, it seems likely that the most immediate impact will be cost escalation as a result of the increase in fuel costs.  If shipping continues to be constrained, then there will be program impacts as delivery of key items of equipment, materials and other supplies are delayed.   A force majeure clause is of limited utility in this context, as it simply provides for suspension of performance of the affected obligations.  Similarly, it is not known what changes in law might yet be affected, so an entitlement granted under this pathway may never even be triggered. 

If the parties agree, best practice would be to include a bespoke clause which addresses entitlements to additional costs and/or an extension of time as a result of the impact of the Middle East conflict.  The specific features of this type of clause will necessarily vary between sectors. 

To protect the principal, no entitlement should crystallise unless preconditions are satisfied, which should include:  

• the occurrence of an objective and measurable relief event, with clearly identified data source(s), baseline values and calculation methodology for any threshold or trigger (including sustained‑period tests to avoid on/off volatility). This could include:
• where fuel is a driver, a clearly defined diesel‑cost threshold applied over a specified period; and
• for supply chain impacts, relief being confined to identified equipment agreed in advance that are sourced from, or shipped through, specified Middle East geographies, and only to the portion of impact attributable to those routes;
• a risk‑sharing mechanism (for example, caps and collars to limit extremes, floors to exclude de minimis movements and/or sharing bands for mid-range volatility) so cost movements are allocated predictably and remain financeable (particularly where project financing applies);
• the impact being appropriately substantiated on an open book basis with contemporaneous evidence (such as supplier quotations);
• any delay being demonstrated by reference to the critical path;
• entitlement being subject to an obligation to mitigate, including enquiries into alternative suppliers, switching suppliers and front-end procurement orders, with contemporaneous records of actions taken.

For contractors, these matters should form part of contract negotiations and should also be flagged in tender responses.

Other possible approaches include:

• a simple rise & fall clause, permitting recovering of escalation in cost of material on the basis of an agreed formula. Parties should be aware though that these types of clauses often offer limited ability to assess what mitigatory actions the contractor has taken to avoid the relevant cost escalation and instead are often drafted as a straight-forward cost entitlement.
• A sunset or review mechanism that switches off or requires renegotiation of the bespoke relief if conditions normalise by a stated date.

Other considerations

1. Mitigation: all parties should be discussing proactive measures to manage the ongoing impacts of the conflict, whether a contract is underway or not yet executed.  Contractors should be asked for a plan to mitigate and manage these risks, and if the project is at its inception, principals should be testing contractors’ supply chain and mitigation strategy together with engagement on the challenges facing project delivery in the current environment as part of a contractor’s tender response.

2. Excepted Risks: the ‘excepted risks’ concept utilised in Australian Standard contracts and many other construction contracts often includes war, invasion, insurrection, etc as an ‘excepted risk’.  These regimes typically seek to allocate risk for the costs of repair and/or reinstatement of the works where there has been loss or damage to the works prior to achievement of practical completion (or handover of the works to the principal).  

These regimes will typically allocate the costs of replacement or reinstatement as a result of any loss or damage caused by an ‘excepted risk’ to the principal (but again, such risk allocation will vary between sectors and will generally be aligned with the insurance coverage obtained by the parties for the project).

3. No double recovery/interaction: if a bespoke clause is to be included in the contract, the contract should clarify how this clause interacts with other relief events, such as force majeure, change in law and insurance recoveries.

4. Funding and bankability: developers should consider any relief regime in the context of their financing package.  Open‑ended cost uncertainty can undermine bankability and drive weaker terms.  Using objective mechanisms — deadbands, sharing bands and aggregate caps on relief — preserves pricing certainty and supports stronger financing outcomes.

5. Marine and Transit Insurance: developers should require contractors to take out marine transit insurance to ensure that loss or damage to goods in transit forming part of the works under the contract are insured for specified events.  The Institute Cargo Clauses, which marine transit insurance is based on, do not typically include coverage for war risks.