The Iran oil crisis: why SMEs can't afford weak commercial contracts

Geopolitical shocks rarely stay confined to the headlines. For UK businesses, they tend to surface instead as missed deliveries, price spikes, broken contracts, unpaid invoices and disputes cascading along the supply chain. Whether a business can absorb that disruption, or is left exposed, usually turns not on the event itself, but on:

(1) how risk was allocated in its contracts before the event;

(2) what its insurance actually covers; and

(3) who ultimately carries liability, when performance fails under English law.

These issues are not reserved solely for large oil companies or energy providers, as in reality, they trickle down into almost every sector of the economy. After all, energy underpins much of modern business activity — from manufacturing and transport, to data infrastructure and service-based SMEs — and disruption in that area, can quickly ripple through supply chains and operational planning, even for businesses very far removed from the energy sector, or from the geographical location of the crisis.

Force majeure clauses

Force majeure clauses are commonly included in commercial contracts to allocate risk where performance is prevented by events outside a party’s reasonable control. Under English law, they operate purely as a matter of contract and can suspend liability, where completing the contract becomes commercially unviable, without opening up an innocent party to the risk of being sued for non-performance. Where successfully invoked, they relieve the affected party from liability for non‑performance for so long as the relevant event continues.

The COVID‑19 pandemic brought renewed focus to the operation of these clauses, with many businesses seeking to rely upon them. In practice, however, it became apparent that many force majeure provisions were narrowly or poorly drafted. General formulations such as “acts of God” or “events beyond a party’s control” often failed to extend to pandemics, government restrictions, or wider supply‑chain disruption. As a result, parties frequently found themselves without the contractual protection they had assumed was available.

The courts of England and Wales apply force majeure clauses strictly. If the particular eventuality that prevents performance does not fall within the scope of the clause, the affected party will not be protected, regardless of how unforeseeable or disruptive the event may have been.

For this reason, it is critical for businesses to have their commercial contracts reviewed by experienced solicitors who understand the unique appetite to risk, negotiation strength and areas of weakness for that particular business. A properly drafted force majeure clause can be tailored to reflect sector‑specific risks, cashflow pressures, supply‑chain dependencies and geopolitical exposure, significantly reducing legal and financial vulnerability when crises arise.

Insurance vs contractual risk allocation

Businesses should not assume that insurance will automatically respond to disruptions caused by fuel shortages, or wider geopolitical instability. Many standard business interruption policies only provide cover where losses arise from physical damage to insured premises, meaning supply‑chain disruption, price spikes or delays caused by third‑party suppliers may fall outside scope. While some businesses hold contingent business interruption or non‑damage extensions, these are often narrowly drafted and may exclude losses linked to government action, sanctions or market volatility.

 In the context of a fuel crisis, businesses may therefore face increased costs, delayed deliveries or contractual failures without a corresponding insurance recovery. As a result, careful review of policy wording, exclusions and triggers, alongside contractual risk allocation, is essential to understand where losses will ultimately fall.

Where losses are not covered by insurance, businesses must proactively allocate business interruption risk at the contracting stage, rather than assuming it can be recovered later.

Common mechanisms could include:

• Force majeure clauses as explained above;
• Hardship or price‑adjustment clauses, allowing contracts to be renegotiated where energy‑related cost increases make performance commercially unsustainable, without placing the business in breach (something that is being seen recently in the aviation industry);
• Limitations of liability that cap exposure for delay, non‑delivery or increased costs caused by events outside a party’s control, reducing the risk of downstream claims;
• Responsibility‑shifting provisions, clearly allocating which party bears the risk of transport delays, fuel availability or supplier failure (particularly in logistics and manufacturing contracts); and/or
• Termination rights for prolonged disruption, enabling businesses to exit contracts where performance becomes unviable, rather than remaining exposed indefinitely/for the duration of the contract.

For many companies, these contractual protections will provide the only meaningful buffer against disruption, where insurance does not respond. Regular contractual reviews — particularly for supply, distribution and customer agreements — are therefore essential to ensure that business interruption risk is consciously managed, rather than left to fall where the law assigns it by default.

Incoterms in brief

Incoterms® are internationally recognised trade rules published by the International Chamber of Commerce which define who is responsible for transporting goods, who bears risk at each stage of delivery, and who must arrange insurance and pay customs or transport costs. They are commonly used by manufacturers, wholesalers, importers/exporters, haulage companies, logistics providers and retailers. When clearly incorporated into a contract, Incoterms can help businesses manage disruption by clarifying when risk transfers, who absorbs fuel‑related transport delays or cost increases, and reducing disputes where supply chains are under pressure. Used correctly, they provide a practical way to align contractual risk with commercial reality during periods of volatility.

Conclusion

The Iran oil crisis is a reminder that geopolitical disruption is not an abstract risk, but a commercial reality with legal consequences across the supply chain. For businesses, resilience is rarely determined by the crisis itself, but by the steps taken in advance: ensuring insurance is understood, contracts are properly drafted, and risk is consciously allocated rather than left to default legal principles. Regular review of commercial agreements in light of evolving geopolitical and energy‑related risks remains one of the most effective tools available to protect businesses when disruption inevitably arises. Should you require such a review, or advise on how to forward plan, long before disruption turns into dispute, please contact Ines Ouadah.