Drafting Contracts to Weather Middle East Turmoil

Every once in a while an event makes prudent attorneys take a very close look at their contracts. The "Middle East Spring," as some have called it, is just such an event.

We are not seeing events that have not been encountered before. While it is amusing in hindsight, I recall negotiating in a Middle Eastern war zone a number of years ago and being asked by my client's customer to replace "war" with "present situation" in the force majeure clause.

The answer was a definitive "no," but the point remains that this is a region where prudence and practicality in contracting are vital to successful projects and relationships, and where clauses dealing with the suspension and delay of work and the consequences of these actions need to be carefully analyzed.

Counsel should be asking four questions immediately:

1. What do their existing contracts say about suspending work and pulling employees out of countries where civil unrest or insurrection make it difficult or dangerous to continue?
2. Does the business have the arrangements and processes in place to be able to respond quickly and effectively to overnight news that another country in the region is in trouble?
3. Are the terms and conditions in standard contracts used as the basis for negotiation in the region sufficient to deal effectively with the kinds of events that we see on news broadcasts and websites every day?
4. Is their negotiation strategy in the region sufficiently well articulated, understood and enforced to ensure that the relevant provisions of standard contracts are not going to be changed in a rush to get a deal?

The Middle East, of course, continues to present wonderful business opportunities. Saudi Arabia, Qatar and Abu Dhabi, for example, offer hugely valuable relationships and projects in both the public and private sectors and, at the date of writing, have not been subject to the problems seen elsewhere. It is for this reason that the third and fourth questions arise.

At the same time, the Middle East and North Africa operate on the basis of a different business culture from our own. This makes experience in the region — in the negotiation and performance of contracts as well as in determining how to respond to crises — important in assessing risk and the available alternatives when deciding how to proceed.

The unusual challenges of successfully negotiating effective dispute resolution procedures, of exercising them and of enforcing judgments and awards in the region are but one example and speak volumes about the need to meld pure legal advice with the practicalities of the region. This applies to addressing the approach to be taken in relation to the current unrest as much as to every other aspect of working there.

For those with existing contracts, the immediacy of finding a solution that balances the commercial needs under a contract with the very obvious plight of employees and their dependents caught up in and possibly trapped by the unrest that we see on our screens is readily apparent.

It is unusual to find a contract that permits an early exit without serious financial consequences, the most immediate of which usually arise from the cessation of payments (even if they are due and owing), the existence of a partially completed phase of work that cannot be billed, the prior posting of a performance bond or something similar, and the local party's retention of a holdback.

In looking at the different levels of severity of the civil disorder in the different countries in the region, it is clear that in many instances there will be a degree of uncertainty on the question of whether work can be suspended and employees withdrawn. It is also common to find contracts where the local customer needs to agree that an event of force majeure exists before the foreign contractor can pull out.

From practical and cultural perspectives, there are ways to mitigate the damage a pullout may do, one element of which is communicating the right message to customers and partners in a way that meets local business and cultural norms. While you should not expect an "easy ride" from local nationals who could well regard you as jumping ship at the first hint of trouble, there are ways to minimize the damage.

Dramatic pictures of workers being evacuated from Libya, the intervention of special forces and the acrimony expressed by those left to find their own way out of the country were vivid testament to the lack of preparedness and means of some companies. Employers should make sure that their evacuation policies and plans are up to date, complete and well understood by all involved, that employees know to keep in touch, and that effective communications with embassies and others with roles in any evacuation are made a priority.

Care should be taken to review and evaluate the employment contracts under which companies have sent staff to the region against the backdrop of the governing law in order to identify the precise obligations which the company owes to its employees.

The U.S. State Department website is a good source of information on risks in the region. The British Foreign and Commonwealth Office website is also well-regarded for its country-by-country risk assessments. These and other sources should be consulted routinely to determine whether and when to act.

Any company operating in the Middle East which does not have policies and plans in place to deal with local disturbances should move very quickly indeed to plug this hole or face the legal and other consequences.

It is an unfortunate truism that our standard contracts are not often going to be accepted by Middle Eastern partners and customers. It makes sense, therefore, to take the opportunity to develop standard documentation that will reduce the time it takes to get to a deal and at the same time find ways to preserve the requisite brevity and clarity of commercial terms and legal protections. The force majeure, delay and related provisions will be key in light of current circumstances.

Where a year ago some might have been prepared to keep these provisions "soft," it is clear that they need to be robust and, if at all possible, expressed in a manner that is not considered to be unnecessarily threatening to the success of the relationship or the project or excessively one-sided.

A key element of the analysis supporting the affected provisions will relate to payment and other financial exposures. Provisions should be drafted to ensure that there is some room to negotiate without losing the protections that current events indicate should be sought.

In the same vein, care should be taken to ensure that a sophisticated negotiating strategy is developed (or if one already exists, then reviewed and updated) and enforced that fully captures the bottom line on these critical issues that need to be dealt with in minimizing the downside risk of doing business in the Middle East.

It should also set out the phasing of concessions with regard to the key, relevant clauses and the implications for the contingencies typically included in the cost calculations for a project. Negotiation in the Middle East is something of an art form, so every effort should also be made to have the negotiators appreciate the finer points of getting to a successful deal there without undue delay and financial exposure.

(An earlier version of this article originally appeared on Law360)