Force majeure: Why companies are triggering a legal safety net as Iran war rages on

RIYADH: As geopolitical tensions escalate across the Middle East, a flurry of legal declarations is sending shockwaves through the global energy market.

From Bahrain to Qatar to Kuwait, companies are invoking a contractual mechanism known as force majeure — a legal provision included in contracts to protect parties from being penalized when unforeseen and uncontrollable events make it impossible to fulfill their obligations.

Since the start of the US-Israel war in Iran, at least four energy companies have invoked the clause, citing concerns over infrastructure safety and delivery restrictions caused by the virtual closure of the Strait of Hormuz.

“In the context of the current crisis affecting the Middle East, the term signals that the disruption is not routine volatility but a genuine breakdown in operating conditions, ports may close, airspace may be restricted, supply routes may become unsafe,” Tobias Aebi, partner at Arthur D. Little, told Arab News.

Bahrain’s state-owned Bapco Energies was forced to declare force majeure after a strike hit its refinery complex in Al-Ma’ameer, sparking a fire and causing significant material damage.

The attack, part of the broader regional conflict involving the US, Israel and Iran, directly prevented the company from guaranteeing scheduled oil shipments to buyers.

Similarly, QatarEnergy issued a force majeure notice regarding its LNG tankers due to security risks in the region and the difficulty of navigating the Strait of Hormuz, a critical chokepoint through which roughly one-fifth of the world’s oil and LNG passes.

Kuwait Petroleum Corp. also declared force majeure, adding to earlier oil and gas reductions from Iraq and Qatar as the war blocked shipments from the Middle East.

In all these cases, the declarations are a formal recognition that the companies cannot control the missiles, drones, and geopolitical volatility disrupting their ability to produce and deliver goods.

It is not just companies in the Middle East triggering this clause.

The scale of such disruptions was starkly illustrated by Gaurab Chakrabarti, CEO of Houston-based specialty chemicals company Solugen, who detailed in a post on X on March 10 a growing crisis in Asia’s chemical sector. 

He wrote: “Sumitomo Chemical declared force majeure yesterday, making it the fifth Asian chemical company in a single week. First Chandra Asri in Indonesia, then Yeochun NCC in South Korea. By March 5, Petrochemical Corporation of Singapore had declared force majeure on 1.1 million tonnes of ethylene capacity on Jurong Island. Aster followed a day later with its cracker running at half capacity.”

Chakrabarti identified the root cause as a disruption to naphtha supplies, which transits the Strait of Hormuz. He noted that the closures resulted in “five force majeures in seven days,” adding that “polymer prices are already up double digits. Everything downstream gets more expensive from here.”

The anatomy of a force majeure clause

The clause is designed to allocate risk and provide a clear framework for handling the unexpected. For it to be effective, it typically includes several key elements.

First, it defines the specific events that qualify, ranging from earthquakes and floods to acts of war and terrorism. It also requires the affected party to notify the other party promptly and to make reasonable efforts to mitigate the impact of the event. 

Lebanon-based attorney Jihad Chidiac, explained to Arab News that the event must arise from circumstances beyond the control of the contracting parties, and must have been unforeseeable, or not reasonably foreseeable, at the time the contract was concluded.

Crucially, the consequences of the event must render performance impossible or substantially impracticable.

The clause then outlines the consequences: whether the contract is temporarily suspended or permanently terminated if the disruption persists. By doing so, it offers businesses contractual certainty in chaotic times, helping to prevent disputes and allowing them to focus on recovery rather than litigation.

The legal gray area of ‘war’

While the concept seems straightforward, the application can be legally complex, particularly regarding what constitutes an “act of war.” Many older contracts simply list “war” as a qualifying event without defining the term.

This can modern conflicts rarely resemble traditional, declared wars. They often involve limited strikes, drone attacks, or regional escalation, events that may not fit neatly into the narrow definition of “war” found in a decades-old contract.

This creates a gray area. In international law, the concept of armed conflict is relatively broad. But commercial contracts are interpreted based on their specific wording and the commercial context.

Chidiac explained that when assessing a claim of force majeure, courts or arbitral tribunals will examine whether the three core conditions are satisfied, irrespective of the traditional definition of war. 

He noted that “where parties entered into a contract in the context of an already unstable regional conflict, tribunals may conclude that the associated risks were implicitly assumed.” 

Chidiac added that “where hostilities escalate in a manner that substantially exceeds what could reasonably have been anticipated at the time of contracting, the invocation of force majeure may be considered more plausible.”

On the question of foreseeability, Chidiac noted that “a central evidentiary reference point is the date on which the contract was concluded.” 

He said that while instability in the Middle East might make some tensions foreseeable, “the closure of the Strait of Hormuz, which would have significant repercussions for global trade and contractual performance, would not necessarily have been reasonably anticipated.”

Milind Jain, head of credit specialties at insurance broking and risk management firm Marsh for the Middle East and North Africa, noted that classification challenges extend to insurance. 

“From an insurer’s perspective, whether an event is treated as war, terrorism or political violence can affect which policy responds, how exclusions apply, and how much cover is available,” he said.

The duty to mitigate

When a company declares force majeure, it does not absolve them of all responsibility. The affected party must make reasonable efforts to mitigate the impact of the event.

Chidiac explained that it involves showing that the company invoking the force majeure clause did not worsen the effects of the event, took reasonable steps to minimize losses, and acted in good faith toward the other party. 

In the case of a refinery attack, he said, mitigation “can include resuming operations where possible, exploring alternative supply options that are feasible and proportionate, and keeping ongoing communication with stakeholders.”

The attorney clarified that mitigation does not require taking extreme measures beyond what is commercially reasonable.

Impact on supply and markets

The declaration of force majeure does not just affect the companies involved; it sends ripples through the entire global supply chain, as seen with Brent crude reaching $119 a barrel on March 9.

Jain highlighted the broader financial implications, particularly for lenders, as “payment obligations are always near-absolute, and force majeure clauses are typically absent from facility agreements.”  

He explained that while force majeure can suspend a commercial contract, it does not automatically excuse payment on a loan. 

He noted that insurance products can respond in different ways: “If there is an agreement by both parties that there is a force majeure event, then both parties can walk away from the contract with no loss. There would therefore be no loss to be paid under the Non-Payment Insurance policy.”

Conversely, if a force majeure claim is disputed, it could lead to a default, which would be covered under a “Political Risk & Structured Credit” insurance policy.

Force majeure clauses are invoked relatively rarely, according to Aebi, typically during major global shocks. He noted that such declarations serve as important signals to the market: “They highlight rising geopolitical risk, can tighten energy or commodity supply, and often trigger higher prices and insurance costs.”

The ADL partner warned that repeated use of force majeure can accelerate shifts in supply chains and investment flows, as companies reassess where they can operate reliably and how much geopolitical risk they are willing to carry.

Despite the disruptions, companies often prioritize local needs. 

Bapco Energies was quick to reassure that domestic market supplies would continue without disruption, supported by contingency plans. 

This distinction highlights a critical aspect of force majeure: while it may suspend international sales agreements, firms are often legally and logistically bound to ensure stability at home.