Construction projects and contracts must consider sanctions risks

Despite this, sanctions risk has not been a primary consideration in strategic decisions taken by global construction companies in relation to which markets to engage in projects in, and nor has it been common for sanctions risk to have been explicitly addressed in construction contracts themselves.

This will need to change if construction contractors are to avoid heightened compliance risk, liability for increased costs, and complicated and expensive disputes.

The impact of sanctions on construction

Sanctions come in different forms, including restrictions on the provision of certain types of goods, services or technology, or on access to funds and economic resources. They are applied as a means of achieving specific foreign policy or national security objectives. Their prevalence has increased in recent years in response to geopolitical turbulence.

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The application of sanctions can influence who companies are able to do business with and where they can source products, services and materials from. In a construction context, construction businesses need to be careful that they are not transacting with sanctioned entities, including indirectly in their supply chain, and may have to reconfigure supply arrangements to obtain the products, services or materials they need without delay, or to change suppliers or the markets they source items from entirely.

The issue is relevant in relation to all sanctions regimes but is particularly acute in relation to Russian sanctions imposed in response to its war in Ukraine. Even where the project is outside of Russia, and a member of the construction supply chain is themselves, or is affiliated with, a Russian entity, the sanctions prohibitions can result in delays.

Conducting robust due diligence on these matters can be complex and time intensive, particularly when sanctions regimes are regularly evolving and their scope is increasingly being tested.

The contractual picture

Where there is a need, because of sanctions, to source materials or equipment from different countries or suppliers than what might have been originally envisaged under contractual arrangements, potential questions can arise over whether the products in question are the same, or of same quality, as what was provided for in the contract, and over liability for additional cost associated with the rerouting of procurement. Local laws and contractual provisions will inform how those questions are answered.

For example, in the Middle East, contracting tends to be undertaken on a lump sum basis and so, from the perspective of a main contractor, it depends on the contract and on the local law as to whether or not a sanctions-related cost increase in materials or procurement can be passed up the line to the employer or passed down the line to the sub-contractors.

Local laws and contracts will also dictate whether materials or equipment can be changed or varied due to sanctions, including whether it is even possible to source the product in question outside of a sanctioned country or without a sanctioned entity being involved in its supply. In Qatar, for example, the Civil Code addresses the concept of impossibility and provides that parties cannot be bound to do something that it is impossible to do, just because the contract requires them to do so.

In our experience, however, the way most construction contracts have been drafted does not enable parties to clearly distinguish liability for increased costs linked to the application of sanctions.

For example, while contracts will commonly include ‘change in law’ provisions, which entitle a contractor to an extension of time and cost, it is not always clear how ‘law’ is defined. It is common, for instance, for the contract to provide for ‘change in law’ provisions to apply to the domestic laws and regulations of the country in which the project is located, but this would not account for extraterritorial sanctions risk stemming from, for example, the US. The result of this is that, in those contractual circumstances, if a contractor encounters delay or additional cost for a sanction-related reason, outside of a domestic change in law, it must carry that cost itself.

There are similar issues with other common construction contract clauses. Penalty waivers, for example, provide contractors with an entitlement to additional time if they are caused delay by an event deemed to fall as an employer risk. Those risks are usually listed by agreement by the employer and contractor – a typical example might be unforeseen ground conditions that a contractor encounters on-site. Sanctions-related risks have not, in our experience, been listed in this way to-date.

Other boilerplate provisions might be said to be unduly weighted in favour of contractors when it comes to addressing sanctions-related risk, such as force majeure clauses.

Force majeure clauses are contractual clauses which alter parties' obligations or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations. Depending on their drafting, such clauses may have a variety of consequences, including: excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate. 

Force majeure clauses can capture a wide range of events, but their scope can adjust in response to things that happen. For example, force majeure clauses included in post-Covid construction contracts will no longer consider Covid-related events to be in-scope, because they are no longer unforeseeable – it is possible to apportion, to manage, that risk now, so it does not qualify as an unexpected event.

Given the increased prevalence of sanctions, there is an argument that sanctions should be carved out of force majeure clauses in a similar way. This would, however, deprive contractors of a potential contractual mechanism for obtaining fair apportionment of liability for sanctions-related risks.

Each of those areas should be looked at, especially on projects where businesses anticipate there could be sanctions-related risks, for example because of links to countries subject to geopolitical turbulence, to make sure the risk is apportioned fairly. The important thing is to ensure the risk is apportioned at the outset, to avoid having to interpret the contract by reference to the relevant local laws and to understand the rules of interpretation, which will inevitably lead to ambiguity and dispute escalation.

The disputes environment

We are seeing increasing evidence of this, particularly in construction disputes and claims where delays or additional costs have been incurred because of disruption to procurement. We have even seen expert evidence being adduced in arbitrations as to the extent to which a particular material or item of machinery was essential to a contract variation, to help the tribunal determine whether the procurement of those goods was subject to sanctions-related restrictions.

Where disputes do arise, the landscape for resolving them has also becoming increasingly muddied.

There is an increasing body of law relating to choice of law or seat of arbitration provisions connected to disputes with Russian entities, for example, which is leading to a multitude of parallel proceeding and injunctive actions.

For example, Article 248 of the Russian Arbitration Code – introduced in 2020 – confers exclusive jurisdiction on the Russian Arbitrazh courts over disputes between Russian and foreign persons arising from foreign sanctions; enables Russian persons affected by foreign sanctions to apply to a Russian Arbitrazh court for an anti-suit injunction prohibiting the other party from initiating or continuing proceedings before a foreign court or international arbitration tribunal located outside Russia; treats an agreement providing for arbitration outside Russia as inoperable; and enables a Russian Arbitrazh court to punish a breach of an anti-suit injunction granted to prohibit proceedings before a foreign court or international arbitration tribunal.

In response, in 2024, EU law makers introduced a power to prohibit businesses from engaging in transactions with those that use article 248, or equivalent legislation, to obtain an “injunction, order, relief, judgment or other court decision” against an EU entity. The UK courts have also issued anti-suit injunctions to restrain proceedings in Russia in breach of arbitration agreements between parties.

For businesses, the prospect of courts not recognising foreign laws or court rulings is hugely problematic for the enforcement of arbitral decisions, and very difficult to contract for.

For Russian entities relying on article 248, there is a growing question of where they might enforce their judgments – because they won't be recognised in, for example, the UK. However, for UK clients with assets in certain countries like Turkey, Armenia or Kazakhstan, there remains a risk that Russian entities will seek to enforce Russian rulings against those assets in those countries. We are seeing this have an impact at a strategic level as to which countries businesses are willing to get involved with projects in. This means consideration of the risk of assets being enforced against in certain jurisdictions is beginning to influence pipeline project selection.

Even where businesses are able to raise parallel proceedings to restrain Russian court involvement in the enforcement of arbitral awards, there is a need for strategic decision making over where they and those they are contracting with might seek to enforce an arbitral award if they win. We're now in a world where that question is being dictated by sanctions, to some extent, as well as enforceability, when disputes involve sanctioned entities or may involve sanctioned entities.

The picture was further complicated for UK businesses by a ruling by a UK court in late 2024, which highlighted how businesses that have obtained a UK anti-suit injunction (ASI) – a court order that place restrictions on others’ ability to bring claims in other jurisdictions – in a bid to restrain parallel court proceedings in Russia, might nevertheless be exposed to the rulings of Russian courts because of the nature of operations engaged in by companies in their group, in the context of disputes driven by sanctions restrictions.

Managing sanctions risk

In addition to addressing contractual uncertainties in view of sanctions-related risks and anticipating potential problems in dispute resolution where related claims arise, construction companies need clear sanctions management policies and protocols prior to starting projects.

Sanctions regimes are broad – they apply both to a business’ direct dealings and their indirect operations, meaning sanctions compliance risk needs to be assessed throughout the supply chain.

In respect of the UK’s Russian sanctions, there are very broad, extending to movements of items to and from Russia. Sanctions restrictions target certain Russian-origin or -consigned commodities which might apply. These prohibit, for example, those bound to comply with UK sanctions from directly or indirectly acquiring iron and steel products which originate, or are located, in Russia. It could mean, from the perspective of a contractor, that they are exposed to sanctions compliance risk if a subcontractor they have engaged procures materials, like steel, from within Russia.

In this scenario criminal liability could arise but only if it can be shown that a business had knowledge or reasonable cause to suspect that sanctions restrictions were being broken. The imposition of civil penalties does not require these factors to be present – they can be imposed on a ‘strict liability’ basis, without need to show knowledge, suspicion or any other fault.

There are other risks associated with sanctions compliance beyond criminal penalties or fines. There is the potential for reputational damage and scrutiny from shareholders, customers and suppliers, which could manifest itself in legal claims.

All these issues require contractors and developers to develop sanctions management policies and protocols, to help guide strategic project-related decisions and contracting.