Salt & Associates hosted a webinar for AHK, the German-Arab Chamber of Industry and Commerce, bringing together executives, managing directors, and senior decision-makers operating in or entering the Iraqi market. The briefing covered contractual risk assessment in Iraq’s current landscape: fiscal constraints, banking restrictions, regulatory changes, and the legal framework governing force majeure and hardship.
What emerged from the session was not a list of legal technicalities. It was a pattern. The companies struggling in Iraq are not struggling because their contracts are badly drafted. They are struggling because they underestimated the system their contracts sit inside.
The Contractual Risk Environment Foreign Companies Underestimate
Iraq’s contractual risk environment in 2026 is shaped by five converging forces that no contract clause can neutralise on its own: government payment cycles operating under severe fiscal constraint, a banking sector with significant USD transfer restrictions, an administrative approval process with structural bottlenecks, active regional instability affecting logistics and insurance, and a public procurement framework comprehensively overhauled in February 2026.
These forces do not operate independently. They compound. A contractor working on a government infrastructure project may simultaneously face delayed budget release under the 1/12 spending mechanism, restricted access to USD transfers through their banking partner, and mandatory compliance with a new procurement instruction their contract pre-dates.
A pre-webinar survey of 47 executives confirmed this directly. Payment delays were cited as the primary concern by 42% of respondents. Contract enforcement followed at 28%. Government approvals at 19%. The striking observation is not the rankings, it is that none of these are purely legal problems. They are operational risks that sit outside the contract’s reach.
The 1/12 Rule: A Risk Most Foreign Bidders Underestimate
Iraq has now operated without an approved federal budget for two consecutive years. Under Financial Management Law No. 6 of 2019, this triggers the 1/12 mechanism: government spending is capped at one-twelfth of the previous year’s actual expenditures per month, covering salaries and existing commitments only.
New capital projects, new contract awards, and advance payments are excluded.
The practical consequence for foreign contractors is direct: bidding on a government project does not confirm that funding exists for it. Several contractors have mobilised, committed resources, and incurred significant costs on projects that subsequently stalled, not because the contract was disputed, but because the ministry had no budget authority to pay. Some have not recovered.
The discipline required is straightforward but consistently overlooked: verify budget allocation status before mobilising, not after signing.
Payment Delays: The Contractual Risk No Clause Can Neutralise
As of February 2026, the Central Bank of Iraq has restricted over 28 banks and 70 exchange companies from USD transactions, reflecting ongoing compliance reform under US Treasury pressure. The official exchange rate sits at 1,320 IQD/USD, with a meaningful gap to market rates that creates real commercial exposure.
The consequence that foreign companies routinely underestimate: even where contractual payment rights are clear, the path from invoice approval to actual receipt of foreign currency can span months. The bottleneck is not the counterparty’s willingness to pay, it is the infrastructure through which payment must travel.
Risk mitigation here requires action before the contract is signed: verify your banking partner’s current CBI status, structure payment channels with redundancy, consider dual-currency provisions, and plan explicitly for transfer delays. These are not contingencies. In the current environment, they are baseline requirements.
What the New Public Contracts Instruction Changes
Instruction No. 1 of 2025, effective 17 February 2026, represents the most significant overhaul of Iraq’s public procurement framework since 2014. Foreign companies with active or pending government contracts need to understand its direct implications.
All public contracts must now be governed by Iraqi law. Dispute resolution defaults to Iraqi courts. International arbitration remains available, but only with Council of Ministers approval, a threshold that significantly constrains the dispute resolution flexibility that foreign companies typically structure around.
Mandatory Ministry of Planning contract templates now apply, which means FIDIC-based frameworks historically used in infrastructure projects cannot simply be imported without adjustment. Variations are capped at 30% of contract value and duration. Suspension beyond 90 days for construction contracts, or 30 days for supply contracts, triggers specific procedural consequences. Termination compensation for lost profit is capped at 4%.
The Federal Supreme Court has also confirmed, separately and unambiguously, that contracts with unregistered foreign companies are void ab initio. This is not a technical risk. It is an existential one. Companies operating under informal or agency arrangements need to assess their exposure now.
Force Majeure and Contractual Risk: Why Most Claims Fail in Iraq
The force majeure provisions in foreign companies’ standard contracts are, in the Iraqi context, largely theoretical.
Iraqi Civil Code Articles 168 and 425 establish a high threshold: performance must be genuinely impossible due to an external, unforeseeable, and unavoidable cause. Increased costs do not qualify. Administrative inefficiencies do not qualify. Budget constraints do not qualify, they are foreseeable. Rerouting does not qualify, because the ability to reroute demonstrates that performance remains possible.
Approximately 90% of force majeure claims in Iraqi courts fail. The courts’ consistent preference is contract continuity and rebalanced obligations, not termination.
The more relevant legal framework for most commercial disruptions in Iraq is hardship, where performance remains possible but has become excessively burdensome. Courts can and do adjust pricing, extend timelines, and rebalance obligations. But they do so on their terms, not those of a foreign party’s standard-form clause.
The practical implication for contract drafting is significant: force majeure and hardship provisions must be defined separately, with distinct mechanisms. Broader definitions should explicitly include government action and inaction, administrative delays, and fiscal constraints. Renegotiation triggers for economic hardship should be built in. And notice requirements must be treated with strict discipline, failure to issue notices on time is one of the most common ways foreign companies lose rights they legally hold.
Managing Contractual Risk in Iraq: The Strategic Observation
Iraq rewards companies that understand the system they are operating inside, not just the contract they are signing.
The regulatory environment is moving, the new procurement instruction, the pending draft arbitration law aligned with UNCITRAL standards, the CBI’s compliance reform programme, and the direction of that change is toward greater institutional structure. That trajectory matters for how foreign companies position themselves today.
The companies that build durable commercial positions in Iraq are not those with the most sophisticated contracts. They are those with accurate situational awareness: understanding where budget authority actually sits, which banking partners remain operational, how approval processes work in practice, and how Iraqi courts approach dispute resolution when things go wrong.
The contract documents the deal. Understanding the system is what protects it.
At Salt & Associates, we advise foreign companies entering Iraq on the full picture, not just the contract, but the fiscal environment, banking constraints, regulatory framework, and approval processes that determine whether that contract performs. If you are structuring a transaction or reviewing your current exposure in Iraq, we would welcome the conversation.
