Long-term supply contracts engage commitments extending over multi-year periods and accordingly require particular attention to the management of risks arising from the passage of time. Under Iraqi law, the framework is established by the Iraqi Civil Code (Law No. 40 of 1951), which contains both general provisions on the law of obligations and specific provisions of particular relevance to long-term arrangements, including the doctrine of hardship under the law. The drafting of long-term supply contracts should accommodate these provisions and structure the contractual response to the principal categories of long-term risk.
Term of the Contract
The term of the long-term supply contract should be specified by reference to a defined number of years, calendar dates, or operational milestones. The contract should additionally address:
- The basis of any renewal, including automatic renewal or renewal upon affirmative agreement
- The notice period for non-renewal
- The transition arrangements at the end of the contract, including the disposal of inventory and the run-off of obligations
- The position with respect to obligations that, by their nature, are intended to survive the termination of the contract
Price Adjustment Mechanisms
The principal risk in long-term supply contracts is the variation, over the term, of the economic equilibrium between the parties. The contract should accordingly provide for price adjustment mechanisms calibrated to the principal sources of cost variation. Common mechanisms include:
- Periodic adjustment by reference to a published index, such as a consumer price index, a producer price index, or a sectoral price index
- Adjustment by reference to defined input cost components, such as raw materials, energy, or labour
- Adjustment by reference to currency exchange rates where the contract engages cross-border pricing
- Periodic renegotiation of price by the parties, with defined consequences of failure to agree
- Most-favoured-customer or benchmarking clauses, providing for adjustment to market levels
The mechanism should be drafted with sufficient precision to support its automatic application without requiring the consent of the parties to each adjustment, save where periodic renegotiation is the intended structure.
Force Majeure
the Iraqi Civil Code provides that an obligation is discharged where its performance becomes impossible by reason of a cause not attributable to the obligor. The doctrine of force majeure is supplemented by the law, which addresses the consequences of impossibility of performance arising after the conclusion of the contract, and by the specific provisions of the Civil Code on the contract of sale. Force majeure under Iraqi law requires that the event be external to the obligor, unforeseeable at the time of contracting, and unavoidable in its consequences. The contract may, and typically should, supplement the statutory framework by defining the events constituting force majeure, the procedure for invoking force majeure, the consequences of force majeure on performance, and the termination provisions where force majeure is prolonged.
Hardship
the Iraqi Civil Code introduces the doctrine of hardship, pursuant to which the court may, in the event of an exceptional and unforeseeable general circumstance rendering the performance of the obligation, though not impossible, excessively onerous so as to threaten the obligor with serious loss, reduce the obligation to a reasonable extent if equity so requires. The provision applies notwithstanding any agreement to the contrary. The civil code has been applied by the Iraqi courts in cases of substantial economic disruption affecting the equilibrium of long-running contracts. The contract may complement by providing for a contractual hardship procedure, including the events triggering renegotiation, the procedure for renegotiation, and the consequences of failure to reach agreement.
Change in Law
Long-term supply contracts engage the risk that legislative or regulatory changes during the term of the contract will materially affect the performance, cost, or commercial basis of the contract. The contract should address the allocation of change in law risk, including by reference to:
- The events constituting a relevant change in law, defined by reference to the legislative and regulatory framework applicable to the contract
- The threshold of materiality at which the change in law clause is triggered
- The consequences of a change in law, including price adjustment, suspension of performance, or termination
- The procedure for invoking the clause
Change in law is particularly material in long-term contracts engaging regulated activities, customs and tariffs, or sectors subject to evolving regulatory frameworks.
Material Adverse Change
The contract may provide for termination or renegotiation in the event of a material adverse change in the circumstances of a party, the contract, or the broader market. Material adverse change clauses should be drafted with attention to the threshold of materiality, the matters to which the clause refers, and the consequences of invoking the clause. The clause should be distinguished from force majeure (which addresses impossibility of performance) and from hardship (which addresses excessive onerousness), as material adverse change typically captures circumstances not satisfying the threshold for force majeure or hardship but materially affecting the commercial basis of the contract.
Volume and Capacity Commitments
Long-term contracts commonly include volume and capacity commitments calibrated to the long duration. The structures include:
- Take-or-pay arrangements, under which the purchaser is bound to pay for a minimum quantity whether or not it is taken
- Supply-or-pay arrangements, under which the supplier is bound to compensate the purchaser for any failure to supply the committed quantity
- Reserved capacity arrangements, under which the supplier reserves defined capacity for the purchaser
- Indicative volumes with no binding minimum or maximum
The structure selected has material implications for risk allocation and the prospect of disputes over the life of the contract.
Dispute Resolution Considerations
Long-term contracts give rise to the prospect of disputes over an extended period, and the dispute resolution provisions should be calibrated accordingly. Considerations include the prospect of multiple disputes arising under the same contract, the importance of preserving the commercial relationship through the resolution of disputes, the suitability of expert determination for technical or financial disputes, and the role of arbitration particularly relevant given Iraq’s accession to the New York Convention with effect from 2022 in supporting the cross-border enforceability of decisions on disputes arising under contracts with foreign elements.
How We Can Help
Etihad Law Firm advises on long-term supply contracts under Iraqi law, including the structuring of price adjustment mechanisms, the drafting of force majeure provisions of the Civil Code, the structuring of hardship provisions complementing.