Qatar - Diplomatic ties severed: Contractual considerations

Since Monday, 5 June 2017, seven countries (Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Yemen, Libya and the Maldives) have cut diplomatic ties with Qatar.

Saudi Arabia, the UAE and Bahrain have closed their air space and territorial waters to Qatar and Saudi Arabia has also closed its land border with Qatar (Qatar's only land border). Egypt has closed its airspace to all flights to and from Qatar but there is no current indication that it will seek to block Qatar-linked vessels from using the Suez Canal. In addition, Qatari nationals are required to leave Saudi Arabia, the UAE and Bahrain and nationals of those countries are also required to leave Qatar.

Companies active in or dependent on intra-Gulf trade routes to Qatar will be considering the implications of these developments on their businesses and contractual relationships. We set out below some key contractual considerations for those impacted by the developments (particularly, if active in the resources and infrastructure sectors). These will become increasingly relevant if the situation escalates.

Performance of contractual obligations

It is important that contracts are reviewed with a view to analysing which contractual rights and obligations are impacted by the developments. Consideration should be given to whether any obligations to perform contracts will be affected and whether any non-performance (including by the contractual counterparty) may lead to a breach of contract. The consequences of a breach of contract should be considered (e.g. rights to call on performance bonds or guarantees, rights to impose liquidated damages or rights to terminate).

A review of the contract should be undertaken with the governing law of the contract in mind. English law does not recognise any general principle of good faith in the performance of contractual obligations which might require a party to alleviate the consequences of strict compliance with a contract, so as to enable their counterparty to obtain relief from onerous obligations. Civil law jurisdictions generally take a more flexible approach, allowing renegotiation in the event of economic hardship. They are also more willing to require parties to act in good faith in performing their contractual bargain.

Force majeure

The contract may include force majeure provisions, which generally operate to suspend contractual rights and obligations on the occurrence of a force majeure event. A force majeure event is typically defined as an unforeseeable event outside the control of the parties which prevents or delays the affected party's performance of its obligations. Any force majeure definition will need to be checked carefully to see whether the events that have occurred fall within the definition.

Often, the contract will provide that the parties' obligations are suspended for as long as the force majeure event is continuing, but sometimes clauses incorporate time limits after which, if the force majeure event is still ongoing, one or both parties may have the right to terminate the contract. The force majeure clause is also likely to impose obligations on the affected party to mitigate the effects of the force majeure event while it is continuing: if this applies, the affected party will need to ensure that it complies with such obligation. Mitigation may, depending on the circumstances, sector etc. involve, for example, seeking to obtain alternative supplies elsewhere.

Hardship

A contract may include a "hardship clause", or an express provision designed to accommodate changed circumstances, such as a price review clause.

However, the provisions will need to be clearly defined and sufficiently certain for the clause to be enforceable as a matter of English law. For example, a price review clause will need to define when the review will take place and how the revised price will be calculated, and set out the consequences if an agreement cannot be reached between the parties (for example, referral of the matter to a tribunal to determine the revised price). Parties to long term gas supply or offtake agreements should consider whether the recent events and resulting economic consequences trigger any price review provisions.

Suspension and termination

The contract may give one or both parties the right to suspend performance or terminate in certain circumstances (for example, for prolonged force majeure).  In addition, contracts often include a right of termination on breach, which may be restricted to "material breach" or "substantial breach". It is important to check to see whether any right of termination arises (whether or not they are intended to be exercised).  Both contractual rights of termination and any rights of termination under the governing law of the contract should be considered. Parties should take great care if seeking to terminate a contract to ensure that they are entitled to do so. This is because, if a party terminates a contract when it has no right to do so, it will have wrongfully terminated the contract, which will in itself constitute a breach and mean that the terminating party may be liable for damages.

Frustration

In certain very limited circumstances it may be possible for a party to argue that the contract is frustrated. The doctrine of frustration operates to discharge the contract automatically, excusing both parties from their future obligations where a frustrating event occurs. A frustrating event is one which: occurs after the contract has been formed; is so fundamental as to be regarded both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract; is not the fault of either party; and renders further performance of the contract impossible, illegal, or radically different from that contemplated by the parties at the time the contract was formed. This is a high threshold. Case law has established that a contract will not be discharged by frustration where a contract is simply more expensive to perform (an example might be where material will now need to be sourced from outside the countries that have transportation restrictions in place); there are changes in economic conditions; or where the seller under a sale of goods contract is let down by its own supplier.

Variations and extensions of time

Construction contracts often provide expressly for circumstances under which the scope of works can be altered in the form of an addition, substitution or omission from the original scope of works. They also address which party will bear the risk of any increase or decrease to the cost of the works as a result. In addition, construction contracts often expressly provide that the construction period be extended where there are delays that are not the contractor's fault. The question of whether the construction period should be extended is often vital as construction contracts generally provide that if a contractor does not complete the works by a specified date the employer will be entitled to recover liquidated damages for delay at the rate stated in the contract. The contractor will only be relieved of its obligation to complete by the deadline if an event occurs for which it is entitled to an extension of time. It is important therefore, in respect of projects impacted by the situation involving Qatar, that consideration is given, both by employers and contractors, to any rights to a variation to the scope of works or to an extension of time (for example, as a result of difficulties resourcing the work force required to work on projects).  

Practical considerations

As a general rule, care should be taken to comply with all contract formalities (e.g. in relation to time limits and notice periods). If a party is seeking to take action (e.g. to claim force majeure), failure to comply with contract formalities may mean that it loses its right to do so. 

It is also very important to keep good records that can be referred to if necessary. Keeping a good record of events and decisions allows for more accurate reconstruction, review and analysis of events and timelines if a dispute arises.

The applicable dispute resolution provisions in the contracts should also be reviewed so that parties are aware of the forum by which any disputes that arise will be resolved (or any requirement, in the first instance to try to resolve any dispute by way of commercial discussions).

Negotiations

A list of sanctioned individuals and organisations, a number of them Qataris or with links to Qatar, has now been drawn up by the countries that have cut diplomatic ties with Qatar. In addition, the UAE is requiring its local banks to apply enhanced due diligence for any accounts they hold with six Qatari banks, including Qatar National Bank. The position in respect of sanctions and monetary flows between Qatar and other GCC states should be closely monitored.

To the extent that parties are in negotiations in respect of contracts relating to Qatar or involving Qatari counterparts then careful consideration should be given to how the events or potential escalation of events would impact on such a commercial arrangement (and consideration should be given to whether there are any contractual provisions that could be included to mitigate such risks). For example, those negotiating LNG sales agreements should be mindful that shipping rates are likely to increase considerably if Qatari vessels were denied access to the Suez canal. 

Contractual considerations will not be the only matters to consider as a result of the recent events. There are a whole range of potential implications, including in relation to employees, banking and finance arrangements, any applicable insurance cover and appropriate corporate governance. Any entity with interests or assets in Qatar should consider, as a matter of priority, the potential impact on their business and how they can best protect their position.

If you would like any further information about any of the issues raised in this update, please contact your usual Ashurst contact or one of the contacts below.