Qatar: Contractual Considerations during the Crisis

Since 5 June 2017 several nations including Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt, Libya, Yemen and the Maldives decided to break off diplomatic relations with Qatar and implement a range of restrictions. The land border between Saudi Arabia and Qatar has been closed as have air and sea routes from the Gulf States. 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. Banks in the region have been stepping back from business dealings in Qatar. Some Egyptian, Saudi Arabian and UAE banks have halted dealings with Qatari banks and Saudi Arabia's central bank has specifically advised banks in the Kingdom not to trade with Qatari banks in Qatari riyals and ordered lenders not to increase their exposure to Qatari clients.

Current contractual relationships

The restrictions pose concern for businesses active in Qatar and those who have contractual relationships linked to the country.

Given the nature of the restrictions imposed on Qatar, it may be that the performance of a contract has become more difficult, more expensive or potentially impossible. In principle, despite the disruptions, businesses will still have to perform their contractual obligations as a party unable to fulfil the terms of a contract may face a claim for damages from the counter-party. As such businesses may be looking for a way to legally terminate contracts impacted by the Qatar crisis. Businesses should not be too hasty in terminating any contracts before properly checking whether they have the right to do so. A party terminating a contract when it has no right to do so will have wrongfully terminated the contract, constituting a breach and rendering it liable to a claim for damages from the other party.

For contracts governed by English law there are several avenues for a party seeking to terminate a contract. The most common avenue is to see whether the contract has a force majeure clause. Such clauses allow contracts to be suspended or terminated on the occasion of a force majeure event. A force majeure event is typically defined as an exceptional event or circumstance which is beyond a party's control and which prevents or delays that party's performance of its obligations. Such events may be defined in the contract and could include war, terrorism and riot. Businesses should look carefully at the terms of any force majeure clause in their contract and seek legal advice if they are not sure whether the current crisis falls within that clause.

The force majeure clause may provide that the parties' obligations are suspended for as long as the force majeure event is continuing, but can also go further and include a time limit after which if the force majeure event is ongoing, one or both parties may terminate the contract. It is crucial for the party seeking to benefit from a force majeure clause to comply with its provisions such as giving notice to the other party. Failure to comply with the terms of the force majeure clause could affect the ability of the business to benefit from relief from performance of its contractual obligations, entitlement to an extension of time for performance and additional costs arising from the crisis, and entitlement to termination of the contract if the crisis is prolonged.

If there is no force majeure clause to assist a party, another avenue is to argue that the contract has been frustrated. Frustration is where an event occurs which renders further performance of the contract impossible, illegal or radically different from that contemplated by the parties at the time the contract was formed. The event must be beyond the contemplation of the parties when they entered the contract. When a frustrating event occurs the parties are excused from further performance and not liable for damages for non-performance. It is rare that a contract will be frustrated and whether or not it can be relied on will depend on the nature of the contract and the precise set of circumstances. Parties cannot use frustration to escape a bad bargain. If the contract has become more expensive or logistically more difficult as a result of the Qatar crisis that will not be enough to discharge the contract.

Whilst it is not typical for certain documentation (such as loan facilities) to contain a force majeure clause, "material adverse change" ("MAC") clauses are more common. In particular, loan documentation that has been prepared on the Loan Markets Association developing markets template, contain a political and economic risk event of default clause, which may also have been triggered as a result of this crisis.  Likewise, there may be other specific events of default in the loan documentation that need to be considered.  Such clauses may need to be invoked and if not, waivers sought.  Further, ISDA documentation generally contain legality provisions which will also need to be reviewed.

Businesses should also check whether the contract has a sanctions clause. These have become more popular in connection with the Iranian sanctions regime but some clauses may be wide enough to cover the suspension or termination of contractual obligations as a result of the restrictions imposed on Qatar.

Future contractual relationships

Businesses about to enter contracts which will potentially be affected by the restrictions imposed on Qatar should seek to ensure that the terms of the contract can deal with the unfolding crisis. This may involve checking that terms offer flexibility regarding the manner of performance of the contract and that the contract allocates the risk associated with the crisis such as delays in performance and extra expenses.

If you would like to discuss any aspect of the Qatar restrictions or have a concern about the impact of the restrictions on your business, please do not hesitate to contact us.