Impact of the Iran War on Supply Chains and Existing Supply Agreements

When unexpected disruptions to supply chains occur, such as those recently caused by the Iran War, many companies face the question of how to respond to the changed circumstances. 

Many supply agreements contain force majeure clauses that may fully or temporarily release the parties from their performance obligations in the event of force majeure. Force majeure is typically understood to mean external, unforeseeable events that are unavoidable even with the exercise of the utmost care. Force majeure clauses usually contain illustrative lists that contractually define certain events—such as war, armed conflicts, blockades, embargoes, sanctions, or government intervention—as force majeure events. In the context of the Iran War, there is strong evidence that events such as the blockade of the Strait of Hormuz, the closure of airspace, or the imposition of embargoes are generally covered by such clauses.

Whether a contracting party can invoke force majeure depends on the specific terms of the contract.

Force majeure clauses often also stipulate formal requirements (immediate notification, obligations to provide evidence and documentation). If these are not met, the affected party may, under certain circumstances, be unable to invoke force majeure. Typical legal consequences include the temporary suspension of performance obligations, the extension of delivery deadlines, the exclusion of claims for damages and contractual penalties, as well as special termination rights.

In addition to force majeure clauses, hardship or price adjustment clauses can be of significant importance. 

Hardship clauses are designed to adjust a contract in the event of profound, unforeseeable disruptions to the contractual balance, without—and this is the key difference from force majeure clauses—completely suspending the parties’ performance obligations. They often provide for renegotiation obligations, a contractual adjustment (e.g., by the contracting parties themselves or through mediation), and, where applicable, termination rights. Hardship clauses have become more common since the COVID-19 pandemic, but they are still not the norm, at least in contracts governed by German law.

As an alternative, price adjustment clauses can also be used to restore balance to the contract. Typical price adjustment clauses include indexation clauses, in which the price trends of two similar or comparable goods are linked, and cost element clauses, in which changes in certain contractually defined cost elements are automatically reflected in a proportional price adjustment. When drafting price adjustment clauses, it is important to note that these may be invalid even in individual contracts. This is because the Price Clause Act (PrKG) applicable in Germany imposes strict requirements on their formulation. 

If no contractual mechanisms have been agreed upon, the German Civil Code provides for two approaches, under strict conditions, to address unforeseeable events.

On the one hand, rights to refuse performance under Section 275(2) BGB may apply if war-related cost increases lead to a gross disproportion between the debtor’s performance burden and the creditor’s interest in performance. It is not possible to provide a blanket answer as to when such a disproportion exists. Rather, the law requires a balancing of all interests in each individual case. However, this often involves considerable uncertainty, as an unjustified exercise of the right to refuse performance may, under certain circumstances, trigger claims for damages by the contracting party.

On the other hand, a contract adjustment may be considered under the principles of frustration of the basis of the contract (Section 313 BGB). The hurdles for this are high: The provision applies only if circumstances that, according to the mutual understanding of the contracting parties, formed the basis of the contract have changed significantly after the contract was concluded, whereby the contractual allocation of risk must be taken into account to a decisive extent. Whether the escalation in the Iran War reaches this threshold depends heavily on the timing of the contract’s conclusion, the intensity of the impact, and the specific terms of the contract. It appears doubtful whether the Iran War constitutes a case of a fundamental change in the basis of the contract. This is because the Federal Court of Justice (BGH) has already ruled, in connection with the 1973 oil crisis, that companies had to anticipate war-related developments in the Middle East and the associated effects on the oil price and take appropriate measures (see BGH, judgment of February 8, 1978 – VIII ZR 221/76). It seems doubtful that the courts would assess the current situation differently. Furthermore, mere reductions in profits or even significant cost increases are generally insufficient to justify a contract adjustment. In practice, therefore, even in the case of serious events such as the Iran War, a disruption of the basis of the contract exists only in the rarest of cases. 

Against the backdrop of the Iran War, companies should critically review their supply agreements as well as their internal organization:

Existing contracts must be reviewed to determine who bears the transport and cost risks, how force majeure, hardship, and price adjustment clauses are specifically worded, and whether contractual penalty and liability provisions should be adapted to crisis-related disruptions. Contractual partners must be informed immediately if there are any impacts on the agreed delivery dates. 

When drafting new contracts, care should be taken to ensure that force majeure clauses are clearly defined, hardship clauses include clear thresholds and procedures, and price adjustment clauses are formulated in a manner that is legally sound and consistent with industry practice.

In addition, companies should establish structured crisis and supply chain management: risk analyses for critical supply chains, alternative procurement and transportation strategies, clear communication channels with customers and suppliers, and careful documentation of all decision-making criteria.

The Iran War serves as a stress test for the crisis resilience of international supply agreements. Those who understand their contractual risk allocation, utilize contractual flexibility regarding force majeure, hardship, and price adjustment provisions, actively manage risks, and engage in structured discussions with contractual partners at an early stage can prevent legal disputes while simultaneously securing their own ability to deliver to customers. For many companies, it is now advisable to adapt their contract templates to this new geopolitical reality.