By Prof Dr Harald Sippel and Raja Nadhil Aqran

Recent military escalation involving the United States, Israel and Iran has increased uncertainty across the Middle East, with potential consequences for Malaysian exporters.

While attention has focused on rising freight rates and shipping disruption, many businesses may be overlooking a critical legal reality: geopolitical instability – or even a full-blown war – does not automatically cancel export contracts.

For many Malaysian exporters, performance obligations remain legally binding even if shipments become slower or significantly more expensive.

Increased freight costs or insurance premiums alone will usually not excuse delivery obligations.

Businesses that assume contracts can simply be suspended during periods of instability may face significant legal and financial exposure.

The current situation may affect shipping routes, insurance premiums, banking channels and sanctions compliance.

Exporters who trade with or through the Middle East – or rely on routes such as the Red Sea or Strait of Hormuz – should review their contractual positions carefully before disruption escalates further.

Contracts usually still apply

Many exporters assume that force majeure clauses automatically come into play during armed conflicts. In practice, this is often not the case.

Force majeure provisions typically apply only when performance becomes impossible, not when it merely becomes more difficult or more expensive.

In other words, if goods can still be shipped through alternative routes, exporters are ordinarily still legally required to deliver under the contract.

Additionally, under Malaysian law, there is no automatic force majeure protection unless it is specifically agreed in the contract.

Without such a clause, exporters may need to rely on the doctrine of frustration, which applies only in limited circumstances and leads to the automatic termination of the contract.

Before suspending shipments, exporters should review their contracts carefully and obtain legal advice where necessary. Unilateral suspension can create greater legal exposure than delay itself.

Delivery delays may trigger penalties

Shipping disruption is currently the most immediate operational risk. Rerouted vessels and longer transit times may affect agreed delivery timelines, potentially triggering penalty clauses or termination rights.

Contracts with fixed delivery dates or “time is of the essence” provisions can expose exporters to liquidated damages if shipments arrive late.

In some cases, buyers may have the right to cancel contracts if delays exceed agreed grace periods.

Exporters should assess potential delay risks early and engage buyers proactively if disruption appears likely.

Rising freight and insurance costs

Freight rates and war-risk insurance premiums have already increased in response to regional instability. However, higher costs alone do not usually cancel contractual obligations.

The key question is who bears these additional costs under the contract. Exporters operating under CIF, CFR or DDP terms typically bear freight and insurance costs, meaning increased rates may directly reduce margins.

Under FOB or EXW terms, the buyer usually bears the main carriage and insurance costs, although commercial pressure may still arise.

Exporters with fixed-price contracts may be particularly exposed if disruption continues for an extended period.

Payment risks may increase

Even when goods are delivered successfully, payment delays may arise during periods of geopolitical instability.

Banks often increase compliance checks during periods of conflict, particularly for transactions involving US dollars or higher-risk regions.

Exporters relying on letters of credit should confirm shipment deadlines and documentation requirements carefully, as even minor discrepancies can delay payment.

Maintaining sufficient liquidity remains crucial and exporters should confirm with their banks that payment channels remain stable before shipments are dispatched.

Sanctions exposure is a growing concern

Sanctions risk has also increased significantly. The United States issued new sanctions related to Iran only last week and we expect the situation to remain very fluid as the conflict in the Middle East continues or even escalates.

Unknown to many in Malaysia, the U.S. Office of Foreign Assets Control (OFAC) currently lists 12 Malaysian organisations/individuals as being sanctioned under one or more Iran sanctions – this is not just a theoretical risk.

Even exporters that do not deal directly with Iran may face exposure if counterparties, vessels or financial institutions become subject to restrictions.

Sanctions violations can lead to frozen payments, blocked shipments and significant legal consequences.

Exporters should ensure that counterparties and shipping arrangements are screened regularly to reduce exposure.

Review contracts before disruption escalates

The most effective way for exporters to manage risk is to review their existing contracts now rather than after problems arise.

Businesses should pay particular attention to delivery obligations, force majeure provisions, pricing terms and payment mechanisms.

Long-term fixed-price contracts may be especially vulnerable if disruption persists.

Proactive contract management during periods of geopolitical uncertainty can significantly reduce the likelihood of disputes later.

While geopolitical developments remain unpredictable, Malaysian exporters can reduce their exposure by understanding their contractual obligations and preparing for potential disruption.

-- BERNAMA

Prof Dr Harald Sippel is Senior Foreign Advisor at Aqran Vijandran Advocates & Solicitors, and Raja Nadhil Aqran is Managing Partner at Aqran Vijandran Advocates & Solicitors.