The Sanctions Blind Spot: Why Contract Law Has No Answer

[Supriya and Deependra are students at Gujarat National Law University.]

The US-Iran preliminary peace pact has ended the conflict, but for commercial actors the hard questions are just starting. The months of sanctions have caused contractual abandonment, payment defaults and disrupted supply chains. The Strait of Hormuz remained functionally closed from March 2026, diverting global tanker traffic and freezing energy supply chains. These disruptions raise a question that existing legal frameworks do not adequately answer: where performance is made unlawful by sanctions, can parties rely on force majeure clauses or the doctrine of frustration? This article argues that neither framework fits. It identifies the doctrinal gap, explains why existing categories cannot fill it, and proposes a way forward.

Why Force Majeure Falls Short

Force majeure clauses are invoked in situations where a contractual obligation is not performed due to some outside event that is beyond both parties' control. Sanctions, as acts of sovereign authority, might appear to qualify which can have a legal effect on the performance. But in practice, sanctions often do not meet the requirements of the doctrine.

The first problem is foreseeability. In order for a force majeure to be invoked, the triggering event must not have been reasonably predictable at the time of the contract. On 22 June 2025, Iran's Parliament approved the closure of the Strait and on January 2026, its Supreme Court decided that international pressure against Iran was predictable since the country has long occupied a significant place in international affairs. For contracts concluded or renewed after June 2025, the foreseeability argument is therefore severely weakened. Foreign tribunals have already rejected force majeure on foreseeability grounds in analogous sanctions contexts.

The second problem is causation. Under Classic Maritime Inc v. Limbungan Makmur Sdn Bhd, the Court of Appeal ruled that a force majeure party must prove it was the actual cause of non-performance and not just a concurrent cause. Where the Iran conflict has simultaneously produced a physical blockade and sanctions, identifying which factor legally caused a party's non-performance is not something existing doctrine handles cleanly.

Why Frustration Fares No Better

The common law doctrine of frustration can be invoked where there is no force majeure clause or where the clause is too narrowly drafted or where the foreseeability bar is not satisfied. According to English law and Indian law, if a "supervening event," not caused by either party, makes performance "radically different" from what was undertaken, the contract will be frustrated. The threshold is deliberately high, and sanctions routinely fail to meet it.

Under Indian law, Section 56 of the Indian Contract Act 1872 codifies the doctrine of frustration (termed 'impossibility of performance'). The Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission held that high threshold test applied in English law applies to Section 56 as well; the supervening event must make performance impossible, not simply more difficult or commercially burdensome. Most importantly it established that an increase in the cost of performance, even to a significant extent, does not breach a contract.

The Supreme Court's ruling in Alopi Parshad and Sons Limited v. Union of India confirms the position: in a wartime supply contract, the court held that increased onerousness of performance due to wartime conditions does not satisfy Section 56, as hardship is not impossibility. After the closure of the Strait of Hormuz, tankers have been making longer, more expensive and more complicated passages around the Cape of Good Hope. It is not impossible to drop the cost of rerouting.

Frustration also fails structurally as it discharges the contract entirely and automatically. An all-or-nothing outcome is not an appropriate fit for most sanctions situations where maybe performance is only partially impeded or temporarily suspended while the commercial relationship remains viable.

The Doctrinal Gap

The lack of a successful implementation of both doctrines shows the structural nature of the problem. The terms of Force majeure and frustration were conceived for physical disruptions; destruction of the cargo, closure of the port, and death of the counterparty. In a situation of sanctions, performance is not impossible, but it is illegal in at least one jurisdiction in which it is relevant. 

A third mechanism — the change-in-law clause, relief can arise if after contracting a law or executive order changes in such a way that it materially impacts on the ability of any party to perform. But this also fails as change-in-law clauses are for changes in the overall law that impact the entire industry, not for precision clauses that specify a certain entity, type of transaction, or other particulars. Even where triggered, the typical remedy is price adjustment or cost compensation and not a clean excuse from performance, which is precisely what a sanctions-affected party needs. Change-in-law clauses, like force majeure and frustration, were built for a different kind of disruption gradual and general. Sanctions are none of these things, and so the third and final traditional exit from contractual liability closes as well, leaving sanctions-induced non-performance without any clean doctrinal home in existing law.

In National Agricultural Cooperative Marketing Federation of India Limited v. Alimenta SA (NAFED), the Supreme Court refused to enforce a foreign arbitral award because the contract's force majeure and prohibition clause had expressly anticipated a government export ban. The court held that Section 32 of the Indian Contract Act 1872, which voids a contingent contract once the anticipated event occurs, applied instead of Section 56, precisely because the parties had foreseen and contracted for that regulatory risk. NAFED shows Indian law already has a doctrinal route for legal prohibition distinct from frustration; the catch is that it works only where the contract itself anticipates the prohibition, which most contracts do not. NAFED thus creates a doctrinal irony that the most honest route for sanctions-based non-performance under Indian law is available only to parties sophisticated enough to have drafted for it. Those relying on boilerplate FM clauses are left without equivalent protection.

This is the doctrinal gap: sanctions create a category of contractual impediment that is regulatory, targeted, jurisdiction-specific, and often reversible. It belongs to neither the physical world of force majeure nor the radical-transformation framework of frustration nor the general-regulatory-shift logic of change-in-law clauses.

A Way Forward

Draft dedicated sanctions clauses. A sanctions compliance clause is not a force majeure. The former has continuing obligations to screen, do due diligence, report, whereas the latter involves the allocation of risk of non-performance. Merging the two in one boilerplate provision is one of the most expensive drafting mistakes in today's commercial contracts. A specific sanctions clause should include: jurisdictions to which it applies; It should be a trigger for suspension or for termination; how costs resulting from delay due to sanctions will be distributed; and preconditions to be met by a party before invoking non-performance clause (licence applications, waivers).

Engage honestly with the hardship doctrine. Where performance has not become impossible but has become commercially ruinous, the hardship framework under Article 6.2 of the UNIDROIT Principles of International Commercial Contracts is more honest and more appropriate than a contested force majeure claim. Hardship does not terminate the contract, it only creates a basis to renegotiate it with an aim to preserve the business relationship while recognizing a material change in circumstances. 

Develop a sequencing methodology for arbitration. With the combined effect of sanctions, physical blockade, and insurance withdrawal, arbitral tribunals are unable to simply follow a three-part test and to achieve a principled result. First, Tribunals shall consider whether there were sanctions which alone prevented the performance in any relevant jurisdiction; second, whether the non-performance was in fact caused by the legal prohibition; and, third, whether there was either physical disruption or commercial disruption that can support relief on its own. This sequence is designed to ensure that sanctions-based non-performance is judged and dealt with separately from other types of non-performance. Neither the ICC, LCIA, nor SIAC currently provides sanctions-specific procedural guidance, and a formal institutional response is long overdue.

Conclusion

The Iran conflict from 2026 has revealed a fault line in the structure of contract law with respect to non-performance. The concept of force majeure and frustration was conceived in the context of actual disruptions. Sanctions are regulatory and targeted, and are limited in their application to a single jurisdiction, and are at least partially reversible. They do not fall into any of the current categories, and if they are subject to those categories then they create doctrine that is over inclusive and under protective. In view of the sui generis nature of sanctions-induced non-performance, a sui generis response is needed: dedicated contractual clauses, honest consideration of the hardship doctrine and an arbitral methodology for multi-cause disputes. The law as written was not designed for economic warfare of this scale and sophistication. Draft for the world as it is, not as contract law assumes it should be.