Strait of Hormuz disruption: Delay risk and claims in UAE and Saudi projects

Large infrastructure and energy projects in the UAE and Saudi Arabia depend on imported equipment. These items are usually procured against tight planned delivery windows that align with the project timeline and commissioning schedule.

If shipping through the Strait of Hormuz is disrupted delivery dates can quickly move beyond those planned windows. If that occurs, procurement delays may impact constructions activities or project completion.

Delay relief and exposure

Most EPC and construction contracts allocate delay risk through extension of time, delay damages and force majeure clauses.

Having regard to this, there are two points to determine how disputes play out:

1. First, disruption alone does not automatically trigger contractual relief. The event must fall within the contract’s relief provisions such as force majeure or other defined delay events.
2. Second, entitlement to relief depends on causation. The key question is whether the disruption delayed completion of the works.

The distinction matters in practice, as disruption to logistics that increases cost or causes delay may not justify an extension of time if the project completion is not impacted. However, late delivery of equipment that delays installation or commissioning may justify time relief and protection from delay damages, subject to the terms of the contract.

UAE law consideration

The UAE Civil Code provides a number of principles that are relevant when external events affect contractual performance.

If performance becomes impossible due to an external event beyond the parties’ control, Article 273 of the Civil Code provides that the corresponding obligation may fall away, and the contract may come to an end.

If performance is still possible but has become excessively burdensome because of exceptional circumstances of a general nature, Article 249 allows the courts to intervene and rebalance the parties’ obligations to restore fairness.

In construction disputes, however, the courts will usually start with the contract itself. The courts will need to show how the alleged events actually impacted the project programme and the agreed completion date.

Saudi law consideration 

Saudi Arabia’s Civil Transaction Law (CTL) adopts a similar framework.

Force Majeure applies where an external event makes performance impossible. Article 110 of the CTL provides that if an obligation becomes impossible due to a cause beyond the debtor’s control, the obligation and the corresponding obligation of the other party is extinguished.

The CTL also recognises the doctrine of exceptional circumstances. Under Article 97, where extraordinary and unforeseeable events make performance excessively onerous and expose the debtor to heavy loss, the court may intervene to restore the balance the contract.

As with UAE law, the contract will usually determine the outcome of the dispute. In particular, the definition of force majeure, any exclusion relation to suppliers or transport disruption may determine whether relief is available.

Strait of Hormuz disruption

Regional instability alone will not automatically give rise to time and cost relief. Several factors will usually determine whether disruption linked to the Strait of Hormuz can justify contractual relief. These include:

1. The actual impact on the delivery of critical equipment or materials;
2. whether the delayed equipment or materials impacted project completion;
3. whether the disruption was foreseeable at the time the contract was signed; and
4. the wording of the relevant force majeure or extension of time provisions contract.

A complete closure of Strait preventing delivery of essential equipment may fall within force majeure or other exceptional event provisions and justify an extension of time.

By contrast, vessel diversion or longer shipping route that extend voyage time but do not delay project completion are less likely to entitle contractors to relief.

Key questions to consider

If you believe your project is impacted by current events, the questions that you need to be asking right now, and which you may need advice on, are:

1. Has war been formerly declared?
2. Under your contract, is the delay or disruption event:
1. a Force Majeure Event;
2. a Political Force Majeure Event;
3. a Natural Force Majeure Event; or
4. a standard delay event;
3. Is a notice required and have you issued a notice?
4. Has the disruption actually delayed completion of the works?

The answers to these questions will often determine whether there is entitlement to an extension of time or other forms of contractual relief.