How armed conflict is redefining dispute risk for global business

Armed conflict is no longer a distant or episodic consideration for global business. Recent events – from Russia’s invasion of Ukraine to ongoing wars in the Middle East and persistent conflict across parts of Africa and Asia – have exposed how quickly geopolitical instability can intrude into ordinary commercial decision-making. For Australian and international businesses alike, conflict now operates as a systemic risk, reshaping the legal, contractual and regulatory environments in which businesses operate.

The legal consequences extend well beyond the conflict zone. Sanctions regimes proliferate, supply chains fracture, contractual performance is contested, and investments are disrupted or impaired – often with little warning. For boards and senior decision-makers, the challenge is not just about managing geopolitical exposure, but understanding how armed conflict is transforming dispute risk itself – and how quickly conventional commercial relationships can harden into complex, multi-jurisdictional legal disputes. 

For much of the post-Cold War era, armed conflict could be treated as a geographically confined risk, largely relevant to businesses operating or investing in the affected region, and manageable through standard contractual protections and political risk insurance. That assumption no longer holds. Today’s deeply interconnected supply chains mean that conflict in one jurisdiction can cascade legal, commercial and regulatory risks rapidly across borders, disrupting production, transport and the financing of goods and services in ways that many contracts do not anticipate. The Ukraine conflict illustrates this shift – its effects were not limited to parties with direct exposure to the Russian or Ukrainian markets but were amplified globally through sanctions regimes across the European Union, the United States, the United Kingdom and Australia, and heightened scrutiny of counterparties, intermediaries and logistics providers.

Conflicts in the Middle East provide a further illustration of how rapidly regional instability can translate into global commercial and legal risk. Attacks on commercial shipping in the Red Sea, and disruption to passage through the Strait of Hormuz have introduced acute uncertainty into maritime trade routes, insurance markets and regional investment. The effects are not confined to businesses with direct exposure to the region. Disruption to this critical corridor has exposed the vulnerability of global supply chains for energy and industrial inputs, amplifying price volatility, increasing counterparty risk and accelerating disputes across downstream contracts and financing arrangements. 

The effects of armed conflict now reverberate throughout the global economy, generating secondary and tertiary consequences that extend well beyond the initial disruption. Volatility in energy markets, supply constraints and rising costs place pressure on commercial arrangements and financing structures, increasing the likelihood of contractual disputes, renegotiation and enforcement challenges. These cascading effects underscore that the economic consequences of armed conflict are neither linear nor containable, and that legal risk often emerges downstream, rather than at the point of disruption. 

Australia’s regulatory and compliance landscape has evolved in parallel. Greater reliance on domestic policy responses to global shocks, combined with the expansion and enforcement of Australia’s autonomous sanctions regime – aligned but not identical to European and US regimes – has materially increased compliance complexity for Australian businesses. Taken together, these developments mean that conflict-related risk has become a mainstream source of legal and dispute risk across a wide range of sectors and supply chains. 

Conflict, contract performance and dispute risk

Armed conflict disrupts the performance of commercial contracts, often transforming operational disruption into legal dispute. When performance is affected by conflict-related events, several key doctrines and contractual mechanisms come into sharp focus, particularly where parties disagree about whether non-performance is excused, or provides a basis for terminating the agreement.

Force majeure clauses are typically the first point of engagement. These clauses, which excuse or suspend performance upon the occurrence of specified events beyond a party’s reasonable control, vary enormously in their drafting. A well-drafted force majeure clause will clearly define the triggering events (including armed conflict, war, sanctions and government action), specify the obligations of the affected party (including notice requirements and a duty to mitigate), and address whether the clause merely suspends performance or excuses it entirely. Recent arbitral and judicial decisions arising from the Ukraine conflict have underscored the importance of precision. Tribunals have scrutinised whether the invoking party can demonstrate a genuine causal link between the conflict or related sanctions and its inability to perform, rather than a mere increase in cost or delay. The lesson for businesses is clear – generic or boilerplate force majeure clauses often may not provide the protection that parties expect, and careful review of existing contract terms is essential.

Frustration of contract provides a further, but limited, avenue of relief. While the common law doctrine can discharge parties from their obligations where performance has become impossible or radically different from what was contemplated, the threshold for establishing frustration remains high. Courts have consistently required that the supervening event render performance truly impossible or fundamentally different, not merely more onerous or expensive. Unlike a well-drafted force majeure clause, frustration is an all-or-nothing remedy: it brings the contract to an end rather than suspending obligations, offering little flexibility and significant commercial risk. For businesses operating in conflict-affected environments, reliance on frustration alone is therefore an uncertain strategy.

Beyond force majeure and frustration, other contractual mechanisms may come into play. Parties should also consider material adverse change and hardship clauses, which may provide mechanisms for renegotiation or adjustment where conflict fundamentally alters the economic balance of a contract. Change in law provisions, price adjustment mechanisms and termination for convenience rights can all become relevant in this context, depending on the terms of the particular agreement.

A critical and often underappreciated dimension is sanctions risk. Sanctions may render contractual performance unlawful, even where the conflict does not directly prevent it. This intersection between sanctions law and contractual performance frequently gives rise to disputes over whether sanctions compliance genuinely excuses non-performance or has been invoked opportunistically to escape an unfavourable bargain. In practice, sanctions considerations – particularly where the parties disagree on whether sanctions compliance is a legitimate basis for non-performance – are a recurring source of dispute.

Sanctions, illegality and disputes risk 

Sanctions regimes have proliferated dramatically in recent years, and their pace of change during active conflict is without precedent. Following Russia’s invasion of Ukraine, the European Union, the United States, the United Kingdom and Australia each imposed successive rounds of sanctions targeting individuals, entities, sectors and financial flows. More recently, the reimposition of Iran sanctions through UN snapback mechanisms and the expansion of designations associated with terrorist organisations have added further layers of complexity. The landscape is dynamic – new designations, de-listings and interpretive guidance are issued frequently, often with immediate effect.

At the same time, supply shortages and constrained sourcing have led businesses to apply for a higher number of sanctions permits to authorise transactions with sanctioned nexuses that would otherwise be prohibited. These pressures are particularly acute following the conflict in Iran, where critical materials or goods cannot easily be sourced from suppliers with no sanctions exposure, embedding sanctions risk directly into supply chain and contracting decisions.

For businesses, this environment demands a proactive and continuous approach to sanctions compliance. Robust screening of counterparties, beneficial owners, intermediaries and supply chain participants is essential, as is the capacity to respond quickly to new designations. Compliance frameworks must be regularly reviewed and operationalised, and staff at all levels must be trained to recognise sanctions risks.

The consequences of getting it wrong are severe. Sanctions breaches can give rise to criminal liability, reputational damage, and the loss of banking and insurance relationships. In a disputes context, sanctions non-compliance can jeopardise a party’s ability to enforce contractual rights or arbitral awards. Recent cases illustrate how sanctions issues frequently move from compliance concern to a central dispute battleground, with parties contesting not only whether sanctions apply, but whether they have been invoked legitimately or opportunistically. Businesses should therefore treat sanctions compliance as not just a discrete regulatory function, but rather an integral part of dispute risk management.

Investment treaty protection

For businesses with investments exposed to conflict-affected states, international investment treaties can provide an important, but often under-appreciated, layer of legal protection. Bilateral and multilateral investment treaties typically guarantee foreign investors minimum standards of treatment, breach of which may give rise to claims against host states before international arbitral tribunals.

Armed conflict may give rise to direct or indirect expropriation of foreign-owned assets, whether through outright seizure or destruction of assets, or through regulatory measures that deprive an investment of its value. Investment treaties generally require that expropriation be accompanied by prompt, adequate and effective compensation, and disputes frequently arise over whether conflict-related measures cross that threshold. In practice, uncertainty often centres on the cumulative impact of state action and the appropriate standard of compensation. 

The fair and equitable treatment standard is also frequently engaged. Investors may allege treaty breaches where host state conduct during or following armed conflict involves a failure to provide physical security for investments, arbitrary changes to the regulatory framework, or denial of justice in domestic courts. Tribunals have considered the extent to which the exigencies of armed conflict affect the host state’s obligations, but have generally held that conflict does not relieve a state of its duty to act in good faith and in accordance with the rule of law.

At the same time, many investment treaties contain exceptions or derogation clauses that permit states to depart from their treaty obligations in times of armed conflict or national emergency. The scope and limits of these exceptions are the subject of developing jurisprudence, with tribunals increasingly called upon to assess whether invocations of such clauses are genuine in their purpose, justified and proportionate.  

For boards and senior decision-makers, the key point is that investment treaty protections shape not only potential remedies, but dispute dynamics. Understanding treaty coverage – and its limits – is therefore critical to assessing sovereign risk exposure, and should be factored into investment structuring decisions from the outset.

War crimes, complicity and escalating dispute risk

Where there is armed conflict, international humanitarian law (IHL) becomes directly relevant to businesses operating in or near the affected territories. IHL can create legal exposure in several ways.  Businesses that supply goods, technology or services that are used by a party to the conflict in the commission of IHL violations may face liability under the domestic law of multiple jurisdictions including Australia. 

Risk also arises where business infrastructure such as factories, data centres or logistics networks may be characterised as dual use, potentially rendering them legitimate military targets under the principle of distinction and placing employees and contractors at risk. 

Businesses operating under contracts or alongside state actors, particularly in sectors such as security, logistics and infrastructure, may find themselves inadvertently drawn into conflict dynamics. In such situations, commercial activities may contribute to violations of IHL. When this occurs, liability can extend beyond the corporation to directors and senior officers who knew, or ought reasonably to have known of the relevant risks and failed to act. 

For boards and senior decision‑makers, the significance of these risks lies not only in potential criminal exposure, but in how allegations can escalate into regulatory investigation, civil claims, sanctions designations and reputational harm. In conflict‑affected areas, IHL considerations    form a material component of legal and reputational risk that requires active oversight.

Managing conflict‑driven dispute risk

Armed conflict is no longer a remote or exceptional risk for most businesses. Recent events have demonstrated how quickly geopolitical disruption can transform an otherwise stable commercial relationship into a complex, multi-jurisdictional legal dispute, often through indirect pathways such as sanctions, supply chain interruption or regulatory action. 

For boards and senior decision‑makers, the implication is clear: conflict‑related dispute risk must be anticipated rather than addressed reactively. Proactive legal planning – including contract drafting, investment structuring, sanctions integration, due diligence and dispute resolution strategy – is essential to effective risk management in a volatile global environment.

Businesses that take these steps early are better positioned to assess their exposure and develop tailored strategies for the challenges that lie ahead.