On March 11, 1930, Mahatma Gandhi, in his speech at the Sabarmati Ashram, Ahmedabad, India, said “Let no one commit a wrong in anger. This is my hope and prayer”.

But conflicts are as old as human society itself, evolving alongside our political systems and the ideas of power, thereby restructuring the configurations of political, social and economic structures. This decade is also being shaped by confrontations arising from divergent beliefs about power and influence.

The Russia-Ukraine war, Israel-Hamas/Gaza war, and the Israel-US-Iran conflict, to name a few, have reformatted geo-politics and geo-economics.

The top consolidated economic impact of the above three conflicts is that they have turned the global economy into a higher cost, slower growth and more disjointed system. Together, they are pushing the world away from efficiency and globalization and towards security-driven economics. Conflicts ostensibly deplete the peace dividend, which aids the financing of social expenditures, making rebalancing of fiscal priorities challenging even in advanced economies.

The impacts, simply put, are : (a) energy insecurity and inflation; (b) trade disruption and higher logistics cost; (c) weakening of global growth by rising  uncertainty and depressing investment; (d) increasing food and facilities vulnerability, especially for poorer import dependent countries; (e) acceleration of the fragmentation of the global economy; (f) huge reconstruction and fiscal burden and also (g) environmental degradation. The result is a more inflation-prone, less predictable and more geo-politically segmented global economy.

The conflicts have reshaped economics and consequently have augmented costs of doing business in terms of uncertainty, time, negotiation effort, monitoring and dispute resolution. Global trade, commerce, operations, supply chains, global value chains, and global production networks are underpinned by commercial – legal contracts.

With the increasing complexities, modern legal contracts must be made further robust in the backdrop of the changing global economics influenced by the conflicts discussed above.

One of the most vital aspects of a contract has emerged as “risk allocation”, which is an economic decision embedded in legal language. Wars, price fluctuations, supply disruptions, and sanctions – these are all economic risks. Contracts allocate these risks through clauses such as:

i. Force Majeure clauses which should explicitly include war, armed conflicts, hostilities, sanctions, embargoes, export restrictions, blockades, and shipping disruptions. The clause must have a clear causation standard; for example, how directly the war must cause the failure or delay in performance for the clause to be validly invoked. Ideally, a well-drafted force majeure clause should define the causation threshold explicitly and include mitigation obligations, evidence requirements, notice procedures, and timelines.

ii. Sanctions which are increasingly becoming non-military tools of war, sovereignty, and commercial law. Financial sanctions, trade sanctions, entity/individual sanctions, sectoral sanctions, and secondary sanctions are some of the types that can not only make performance of contracts difficult , but also illegal or impossible to perform. The imposition of sanctions can be made part of the force majeure Additionally, a representation and warranty that no sanctions are applicable at the time of execution of the contract may be incorporated.

iii. Material Adverse Change/Material Adverse Effect clauses, which should cover war or geo-political tension as a trigger impacting business viability, ability to perform the contract and financial condition and a renegotiation or exit strategy when the conditions materially worsen.

iv. Hardship clauses which are prudent to be incorporated to take care of fundamental changes in the economic equilibrium, with an obligation to renegotiate in good faith, falling back on termination or arbitration if renegotiation fails.

v. Change in circumstances clauses which may also be additionally incorporated for renegotiation of the contract if need be, on the occurrence of such change which may make the performance of the contract difficult and/or unviable.

vi. Supply chain and delivery disruption clauses which need to have as many specifics as possible because war unsettles logistics more than anything else. The clause should focus on flexibility in delivery timelines, alternate routes, substitute suppliers with allocation for freight cost increases and delay risks. This clause should also have a notice process embedded in it and an eventuality in the event of a prolonged disruption.

vii. Price adjustment and/or Price escalation clause, as conflicts amplify volatility across every cost component. Wars, inter alia, give rise to energy shocks, logistics and freight disruptions and escalation of insurance premiums. Further, there is supply chain disruption, currency volatility and cost increase induced by sanctions. Wars may not always make performance of a contract impossible, but may make it expensive and thus commercially unfeasible to be performed. Thus, modern contracts should have a price adjustment clause detailing that if there is a material increase or decrease in the cost of performance of the contract due to the events specified therein, fixing a cost variation threshold, then either party may invoke the said clause. A price correction mechanism including indexed adjustment, that is, an agreed formula of adjustment moving in line with a recognised benchmark/ index; can be incorporated in the contract along with a mechanism for the consequences of failing to agree to a specific adjustment, which may include reference of the matter to an independent expert for determination, or even arbitration or termination.

viii. Payment and currency clauses which can be drafted in some detail, addressing currency fluctuations, delay in payments due to restrictions, and suggesting an alternate payment mechanism such as escrow or alternate currencies.

ix. Termination clauses which need to tie up to the war realities, including termination for prolonged force majeure, sanctions illegality, or triggers material adverse change or others.

x. Governing Law and Dispute Resolution mechanism which must be clearly detailed by selecting neutral and stable jurisdictions, preferably international arbitrators with a seat of arbitration outside conflict zones.

xi. Insurance and Risk Allocation is another crucial aspect of modern contracts, providing for insurance for political risk and war risks.

Geo-political risks must be addressed with as much rigour as commercial risks in modern contracts. The past decade has reinforced that we are living in a VUCA world marked by volatility, uncertainty, complexity and ambiguity. Thus, contracts also cannot be static documents which merely set out rights and responsibilities. Today, contracts will have to incorporate dynamic risk allocation frameworks. Renegotiation is becoming more common, shifting the focus from enforcing performance regardless of circumstances to preserving the commercial relationship under stress. In today’s reality of conflicts, contracts have to go further, possibly even beyond risk allocation to maximal risk anticipation and from rigid governance to adaptive performance. The modern contract transcends its role as a legal instrument, serving instead as a pragmatic, living framework capable of withstanding disruption, absorbing shocks, and adapting to an increasingly dynamic environment.

Authored by : Sucharita Basu, Managing Partner, AQUILAW and Aadidev Basu, Research Associate, AQUILAW

More from AQUILAW