Contracts in crisis

Subhojit Sadhu and Himanshu Chahar of CAM – Middle East review the legal principles governing the discharge of contractual obligations amid the ongoing West Asia war and the Strait of Hormuz blockade.

The Strait of Hormuz stands as a vital global maritime energy chokepoint, with approximately 20 per cent of the world’s petroleum liquids consumption and international liquefied natural gas (LNG) trade passing through its waters. The ongoing war in West Asia and the resulting blockade significantly restricted flows, causing global crude oil prices to increase 40-58 per cent since February 2026. India’s exposure is deep as the Gulf remains central to its LNG and fertiliser supply chains. A serious Hormuz disruption carries consequences well beyond higher freight and fuel prices, feedstock availability, industrial continuity, and contract performance across sectors. The consequences are already apparent — fuel shortages have shuttered industrial units and fertiliser supply chains, shipping schedules, freight insurance premiums, and letters of credit are all facing immense pressure.

The war’s timing could not be more damaging for India, given the multimodal trade route unveiled at the G20 Summit in New Delhi in 2023 — India-Middle East-Europe Economic Corridor (“IMEC”) — designed to connect India to Europe via the Arabian Peninsula. However, the recent conflict has severely disrupted this plan, undermining core assumptions like open shipping lanes, unrestricted energy movement, and regional stability. Infrastructure development agreements, EPC contracts, offtake agreements, financing arrangements, and joint venture structures negotiated against a different geopolitical reality are now being scrutinised for their risk allocation provisions. Across sectors, businesses are questioning their legal obligations given these new challenges.

FORCE MAJEURE: WHAT THE CONTRACTS SAY

A force majeure clause may relieve parties from contractual obligations when an extraordinary event beyond their control occurs. Most commercial contracts include war as a potential triggering event. Nevertheless, the mere outbreak of a war does not automatically excuse performance; instead, it must be determined whether the war, or acts in furtherance thereof, have rendered performance impossible or fundamentally altered the nature of the agreed terms. A contractor who can no longer procure material through the Strait of Hormuz because of a naval blockade is in a materially different position from one who faces higher costs because freight insurance premiums have increased. The first may have a compelling force majeure argument; the second, absent specific contractual language, faces an uphill battle.

Affected parties should immediately assess whether existing contracts contain a force majeure clause, listing “war”, “blockade”, “government action”, or comparable events; whether the clause requires the event to be the sole or proximate cause of non-performance; whether there are notification requirements, failing which the right to invoke force majeure may be waived; and whether the clause provides for suspension, termination, or merely a price adjustment mechanism. The force majeure analysis will vary depending on the governing law — the same disruption may yield suspension under one contract, judicial rebalancing under another, and no relief at all under a third.

A distinct issue arises when performance remains physically possible but is rendered illegal by sanctions, export controls, or emergency regulations enacted after signing the contract. In such cases, change-in-law or illegality provisions rather than force majeure may be a better legal fit, often carrying different notice thresholds and cost-allocation consequences.

FRUSTRATION AND THE PRICE QUESTION

Where no force majeure clause exists or is inapplicable, the doctrine of frustration may apply. Frustration enables parties to be released from future obligations when performance becomes impossible or illegal due to an unforeseen or unpreventable event, and where the contract does not address such circumstances. The concept of “impossibility” extends beyond physical impossibility and includes situations in which a supervening event so fundamentally alters the foundation of the agreement that performance is no longer practicable, given the parties’ original intentions. Nevertheless, frustration will not apply solely because circumstances have changed or performance has become more costly.

Price escalation will probably be the most contested disputes battleground following the crisis. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH, the House of Lords held that a contract was not frustrated where goods could still be shipped via an alternative route at roughly double the freight cost performance, though costlier, was not fundamentally different. However, it was observed that truly “astronomical” cost increases might support a frustration argument. In Easun Engineering Co. Ltd. v Fertilisers and Chemicals Travancore Ltd., the Madras High Court (of India) upheld an arbitral finding that a 400% price increase caused by war conditions in the Middle East justified relief under the contract’s force majeure framework. The Supreme Court of India’s decision in Alopi Parshad & Sons Ltd. v Union of India also remains instructive: courts will normally hold parties to the bargain they made, even if war has driven costs beyond what was anticipated.

Given that global crude oil prices have increased 40-58 per cent since February 2026, many affected parties will be asking whether this crosses the “astronomical” threshold. The answer depends on the specific contract, the margin built into the original price, and the governing law. Critically, courts are likely to examine whether the relevant increase or shortage is contract-specific, causally linked to the supervening event, and incapable of being reasonably mitigated by substitute sourcing or alternative routing.

ACTIONABLE: IMMEDIATE PRIORITIES

For parties with commercial exposure to the affected corridor, the immediate priorities are as follows:

• Undertake a thorough review of all contracts. Do not wait for the counterparty to invoke force majeure; identify risk allocation provisions, governing laws, dispute resolution clauses, and any price escalation or hardship mechanisms.
• Send notices promptly. A party who was on notice for deteriorating conditions and failed to act may find their legal position significantly weakened.
• Document everything; courts and arbitral tribunals will scrutinise contemporaneous evidence carefully.
• Consider renegotiation; contracts with fixed-price clauses that are now commercially unviable may require mutual reconsideration to avoid prolonged litigation.
• Review the finance and insurance stack. Assess whether current events trigger material adverse change definitions, drawstop conditions, or affect the continuing validity of guarantees and letters of credit. Additionally, evaluate the availability of war-risk marine cover and political risk insurance.

CONCLUSION

The West Asia conflict and the blockade of the Strait of Hormuz have redrawn the commercial landscape for businesses with exposure to the India-Middle East corridor. The legal doctrines of force majeure and frustration are now being stress-tested in ways that the drafters of most commercial contracts did not anticipate. Discharge from performance is more achievable when a particular resource cannot be obtained and no substitutes exist, or if government regulations make fulfilling obligations unlawful. As new disputes arise, courts may have to reconsider pre-existing standards of what is or may be considered a reasonable price increase or permissible delay. For affected parties, the advice is straightforward: read your contracts carefully, act promptly, document diligently, and engage your advisors early.

 Text by:

1. Subhojit Sadhu, partner (finance & infrastructure) & director, Cyril Amarchand Mangaldas (CAM – Middle East)
2. Himanshu Chahar, partner (corporate) & director, Cyril Amarchand Mangaldas (CAM – Middle East)