The current conflict in the Middle East started at the end of February 2026 and despite ongoing ceasefire negotiations, the effects of the conflict remain highly uncertain.  This is only the latest geopolitical event to impact the world economy following on from the COVID pandemic, the Ukraine war and the imposition of tariffs by the US administration on most trading partners.

The current conflict is increasing cost and delaying supply, manufacture and production of resources sourced in the region.  These include oil, cement and steel and subsidiary products ranging from damp proofing material and pipes to fibre optics and semiconductors.

We review the potential contractual routes for Hong Kong Contractors to recover additional time and cost resulting from the conflict.

Contracts, General Conditions of Contract that address the effects of conflict

Many standard form construction contracts have clause(s) that address war, and the effects of war such as accommodating delay in the performance of the works and fluctuation in costs.

Three popular standard forms of construction contract that are commonly used in Hong Kong are considered:

1. Hong Kong General Conditions of Contract for Civil Engineering Works;
2. Airport Authority Hong Kong, General Conditions of Contract; and,
3. The New Engineering Contract, NEC 4.

Our review is based on the standard unamended contract forms. Parties should carefully review any bespoke changes or special conditions.

Hong Kong General Conditions of Contract for Civil Engineering Works 1999

This contract has a “special risks” clause described by GCC Clause 84, within which the effects of war “in any part of the world” are addressed.  This clause requires the Contractor to use his best endeavours to complete the works in the event a “special risk” event occurs. Once a special risk occurs, the Employer is entitled to terminate the contract.

Upon termination the Contractor shall demobilise and remove all resources that are not part of the project (for example plant, labour and staff), and payment shall be made under Clause 84(3) for all direct and indirect works properly complete, all materials properly procured that the Employer ultimately has possession of and any cost reasonably incurred by the Contractor in expectation of completing the works not paid under any other clause in the contract.

The Contractor is indemnified against any type of damage encountered by the project as a result of the effects of the special risks, but, where the project is not terminated, the additional time and additional cost and expense as a result of a special risk are not addressed in Clause 84.

Delays in delivery of materials and shortages could be claimed pursuant to the special circumstances, Clause 50(1)(b)(xi). This clause  states that if in the opinion of the Engineer, the cause of delay is the result of any special circumstance of any kind whatsoever, then the Engineer shall consider whether the Contractor is fairly entitled to an extension of time for the completion of any section of the works or the whole of the works.  The Contractor must ensure that the particulars are specific, describe in detail what was encountered and how that directly caused delay – causal effect.  However, whilst the special circumstances route provides for extensions of time for completion, there is no provision for recovery of any time related cost.

Pursuant to the GCC 50(1)(c)(ii), any delays in the arrival of Constructional Plant or labour, either locally or globally, are the Contractor’s obligation and liability.  However, delays due to  shortages or non-delivery of materials could conceivably be claimed under the special circumstances clause above (Clause 50(1)(b)(xi)).

Separately and in addition to the above clauses, the GCC provides the Contractor with a contract price fluctuation mechanism, GCC Clause 89, intended to remunerate the Contractor for changes in price after the tender is submitted.

The contract index figures are compiled by the government. However, the indices have some material limitations such as:

• all index figures are trailing figures, meaning index figures are delayed when compared to what is actually experienced;
• the labour index is one composite average figure thereby diluting the impacts of material price increases;
• the materials index is limited to twenty materials, and the mechanical and electrical related materials are limited to four types of pipe only; and,
• the index must relate to the Schedule of Proportions meaning that the rise or fall in the value of the Contractor’s claim does not exactly represent the rise or fall in the value of the Contractor’s costs.

That said, it goes some way to mitigating the risk of changes in the prices of direct costs.  In addition, some costs may be fixed at the date of procuring subcontracts or supply agreements, whereas the index figures are applied on a monthly basis throughout the contract period.  This is a reasonable although not exact solution to mitigating some of the risks of changes in the cost of materials but will likely not compensate the Contractor for significant price escalation over short periods of time.

In this contract, there is no remedy available to the Contractor for a change in the law, as stated in GCC Clause 30. Therefore, any change in law that might be made as a result of a local or global conflict (direct or indirect) would be the Contractor’s liability.

Airport Authority Hong Kong Contracts

The standard terms for the Airport Authority AAHK include special risks, GCC Clause 74, wherein war in any part of the world that materially affects the execution of the Works can be claimed.  Both additional time (GCC Clause 44) and additional cost (GCC Clause 54) can be claimed.  In addition, disturbance to the progress of the works can be claimed (GCC Clause 55), meaning cost and expense for direct and indirect works can be claimed.  However, a direct causal link must be established between the special risk and the effect.

AAHK contract terms do not include a clause for fluctuations so cost increases arising from the Middle East conflict would likely be the Contractor’s risk if they cannot be claimed in accordance with GCC Clause 54 and or GCC Clause 55.

New Engineering Contract, NEC 4

The NEC suite (formerly New Engineering Contract) is a modern, collaborative family of construction contracts, developed by the Institution of Civil Engineers (ICE).  The NEC has six main options comprising Options A to F.

Core Clause 19 addresses prevention.  This clause is for any significant and unexpected event that is outside the control of either party, that makes it impossible to perform the contract as described by the Accepted Programme, either on a temporary or permanent basis.  It must have been deemed so unlikely to occur that an experienced Contractor would not have made any allowance for this risk and an event which neither party could have prevented.  The event is likely to have been notified as an early warning event, and pursuant to Core Clause 19, the event will become a compensation event Core Clause 60.1(19).  Conflict, political violence and or war are grouped and included under this clause.

Core Clause 19 is designed to provide a remedy for time, but if delays lead directly to additional costs, then cost may be claimed too.

Options A, B, C and D are compatible with Secondary Option X1, Price adjustment for inflation.  If Clause X1 is included in the Contract, the price adjustments will reflect the proportions stated in the Contract Data. As with the indices under the HK Government Conditions, there can be a lag between the effects of Price increases being felt by the Contractor and their impact being reflected in any indices. Furthermore, the Schedule of Proportions is unlikely to reflect the actual increases being experienced for individual elements, for example, significant increases in fuel prices.

Calculations for Options A and B are different to Options C and D, the latter two being target contracts.  The aim however is the same, which is to share the risk of inflationary pressures on resources to achieve the best value for money projects and project outcomes for the Client.

Options E and F are cost reimbursement options, so inflation risk already lies with the Employer and consequently Secondary Option X1 is not applicable.

Core Clause 91.7 also provides that the Client, at its discretion, may terminate the Contract if an event occurs which stops the Contractor completing the whole of the works or stops the Contractor completing the whole of the works by the date shown on the Accepted Programme and is forecast to delay completion of the whole of the works by more than thirteen weeks.

The event must be an event that neither party could prevent and that an experienced Contractor would have judged at the Date of the Contract award to have had such a small chance of occurring that it would have been unreasonable to have allowed for it.

In all instances, the contract must be followed.  In equal measure, the Contractor and the Project Manager should issue early warnings as soon as they are aware of any matter that may result in additional time and or cost.  The parties should take measures to avoid or otherwise manage and mitigate adverse effects pursuant to Core Clause 15.

Concluding Thoughts

Unexpected and unintended outcomes are normal from complex situations.  The Middle East crisis is impacting the production and delivery of natural resources and will undoubtedly continue to produce complex, unexpected and unintended outcomes.  Contractors should stay alert, monitor the situation closely, make clear written notices as soon as they are aware an event may create a claim for additional time and or additional cost, keep detailed records on a daily basis and consider resources appropriately.

Contractors should engage early with and provide notice to the Employer or Client of relevant events and proposed mitigation measures.  Swift action is better. Timing will be critical.

The Contractor has a general duty to mitigate the effects of Employer risk events on the works.  Subject to express contract wording or agreement to the contrary, as stated by the SCL Delay and Disruption Protocol 2nd Edition, the Contractor’s duty to mitigate does not extend to requiring the Contractor to add extra resources or to work outside its planned working hours.  Neither does the Contractor have a duty to carry out mitigation that would constitute a change in scope.

In addition, the Contractor has a general duty to mitigate any loss resulting from an Employer risk event, which has two aspects: first, the Contractor must take reasonable steps to minimise its loss, and secondly, the Contractor must not take unreasonable steps that increase its loss.

There may be other routes to remedy the effects of the conflict on construction projects outside the general conditions of contract either in bespoke special conditions of contract or outside the contract. In the event the contract becomes physically impossible (or radically different) to perform, the common law doctrine of frustration may be an option for terminating the contract.

About Contract Dispute Consultants

With offices in Hong Kong and Singapore, CDC are Asia’s leading claims and contractual consultancy providing support to first tier contractors working on complex infrastructure and building projects worldwide. We work to manage and minimise contractual risk to assist contractors in negotiating early resolution of issues before they escalate. Recent assignments have included advising contractors on NEC3 and NEC4 projects involving metro, tunnels and water works. Other assignments have included rail projects in Canada and Hong Kong, cable stayed bridges in the United States, Canada and Hong Kong, power projects in the UK and airport projects.