Systemic constraints, accelerating regulatory reform, and geopolitical pressure are reshaping the legal calculus for companies doing business in one of the region’s most consequential markets.
The legal and commercial risk facing foreign operators in Iraq has rarely been more complex. Iraq sits at the intersection of three converging pressures: a domestic legal framework undergoing its most significant modernisation in decades, a fiscal architecture that routinely subordinates contractual obligation to administrative process, and a regional geopolitical environment in which the United States–Iran tension is not background noise but a live variable in commercial risk assessment. For foreign companies operating in Iraq – or pricing entry into it – the legal consequences of these pressures are concrete, present, and frequently misunderstood. The gap between contractual expectation and operational reality is where disputes are born.
The B2G Structure: Where the Risk Is Concentrated
Iraq’s economy is, in its commercial substance, a government-driven economy. The oil sector funds the state; the state funds the market. The consequence for private operators is that the majority of commercially significant contracts – across infrastructure, energy services, logistics, healthcare, and professional services – engage a government counterparty directly or depend on a government-funded supply chain. Business-to-government contracting is not a segment of the Iraqi market. It is the market.
This structural reality carries a legal implication that no amount of contractual drafting can fully neutralise: performance under a B2G contract is conditional, in practical terms, on the administrative health of the state at the time performance is due. Ministerial approvals, interagency sign-offs, and procurement validation procedures are not impediments that sit outside the contract – they are part of the performance environment that the contract must be designed to survive.
Delay is administrative before it is contractual.
The One-Twelfth Mechanism and the Fiscal Architecture of Default
Iraq’s constitutional order permits extended periods of government formation during which a fully approved annual budget does not exist. In those periods, the state reverts to a spending mechanism that limits monthly public expenditure to one-twelfth of the prior year’s approved budget. Salaries and existing commitments are maintained. New project spending and contract extensions are not automatically protected.
For a foreign company that has mobilised resources, incurred costs, or committed supply chains in anticipation of payment under a public contract, the one-twelfth mechanism is a systemic cash-flow interruption with no contractual trigger. It arises not from any breach by the counterparty but from a fiscal constraint that the government counterparty has no individual authority to override. Verifying confirmed budget allocation before mobilisation is not a negotiating position – it is a condition of financial prudence. Contracts that proceed without it carry an avoidable and material payment risk.
The mechanism also raises a question that Iraqi civil law does not answer cleanly: whether a payment obligation delayed by fiscal constraint constitutes a breach, a hardship event, or simply a feature of the contracting environment that a sophisticated party ought to have anticipated. Iraqi courts have not produced a settled line of authority on the point. The drafting of payment terms, and of late-payment clauses that survive the fiscal calendar, therefore demands legal precision that standard international templates do not provide.
Payment Delay Risk: Systemic, Not Incidental
Payment delay is the most consistently reported operational challenge for foreign companies in Iraq. It is not, in the first instance, a legal failure – it is a structural feature of a market where fiscal flows are concentrated in the state and disbursement depends on administrative chains of variable efficiency. Its legal consequences, however, are significant.
A foreign company seeking to enforce payment against an Iraqi government counterparty must navigate a system in which the enforcement of monetary judgments against public entities involves layers of procedural complexity that international counterparts rarely anticipate. Letters of credit – where they have been available and correctly structured – have provided the most reliable instrument of payment protection, with documented cases of successful recovery even where the process has extended well beyond the original contractual timeline.
Payment terms must be anchored to verifiable, documented deliverables. Late-payment provisions must be explicit and must survive the specific procedural requirements of Iraqi contract law and notarisation. Banking counterparty risk requires active management: not all Iraqi financial institutions maintain the correspondent relationships necessary for efficient cross-border settlement, and some are subject to restrictions that create both operational and compliance exposure. KYC and AML due diligence on banking partners and exchange companies is, in the current environment, a legal necessity rather than a compliance formality.
Public Contracts Instruction No. 1 of 2025: Mandatory, Material, and Largely Untested
The most consequential recent development in Iraq’s public contracting framework is Public Contracts Instruction No. 1 of 2025, issued under the authority of the Ministry of Planning. The Instruction restructures the legal architecture of public contracts in three fundamental respects.
First, it mandates Iraqi governing law for all public contracts. English law, Swiss law, and other foreign governing law elections – previously common features of large government contracts negotiated with international counterparties – are no longer available.
Second, the Instruction imposes mandatory template terms from which parties cannot derogate. Variations to contract scope are capped at thirty percent of the original contract value. Suspension rights are differentiated by contract type: ninety days for construction contracts, under thirty days for supply arrangements. Compensation for lost profit on termination by the public entity is fixed at a maximum of four percent. Minimum warranty durations are prescribed. These are mandatory provisions that override contrary contractual terms.
Third, the Instruction requires that public tenders be advertised and managed through a unified electronic procurement platform operated by the Ministry of Planning. The platform’s rollout is incomplete at the time of writing, but the trajectory of adoption is clear and the expectation among practitioners is full coverage of the substantial majority of public tenders within one to two years.
Registration Risk: A Condition of Legal Existence
A foreign company providing services inside Iraq that has not registered with the relevant Iraqi authorities cannot validly contract with Iraqi public or public-private entities. The consequence of that absence is not a procedural deficiency capable of cure after the fact – it is nullity. Contracts entered into by unregistered foreign companies for services performed inside Iraq are void, with legal consequences that extend to both parties.
Arbitration: Constrained, Evolving, and Structurally Immature
Iraq’s dispute resolution framework for commercial matters is in a state of meaningful but incomplete transition. A draft arbitration law, understood to be aligned with UNCITRAL model standards, is expected to introduce legislative clarity on the enforceability of arbitration clauses, the supremacy of properly constituted arbitral awards, and the jurisdictional framework within which Iraq-seated arbitration operates.
Iraq also lacks, at present, a mature institutional arbitration infrastructure. There is no established commercial arbitration centre of the kind that operates in Dubai, Paris, London, or Singapore – no body capable of administering complex international commercial disputes with the institutional competence and procedural reliability that large-scale international investment requires. Legislative reform will not, of itself, supply that infrastructure. Its development will follow investment in legal services, practitioner expertise, and institutional credibility over a horizon measured in years, not months.
Force Majeure and Hardship Under the Iraqi Civil Code
The distinction between force majeure and hardship under Iraqi Civil Code No. 40 of 1951 is one of the most practically consequential points of Iraqi contract law for foreign operators, and one of the most consistently misapplied.
Force majeure under the Civil Code requires factual impossibility of performance. The threshold is objective and strict: the contractual obligation must have become genuinely incapable of performance, not merely more difficult, more expensive, or commercially less attractive. Claims advanced on force majeure grounds that rely on operational disruption, cost escalation, supply chain difficulty, or market deterioration will fail unless they can demonstrate that performance has become objectively impossible. Disruption does not excuse performance – impossibility does.
Hardship – grounded in the Iraqi Civil Code’s framework for exceptional and unforeseeable circumstances that render performance excessively burdensome without making it impossible – is the more appropriate doctrine for the majority of disruption scenarios that foreign companies encounter in Iraq. Iraqi courts, applying this doctrine, have shown a consistent preference for contractual continuity over termination: the judicial response to a successful hardship claim is typically rebalancing of obligations, extension of timelines, or reallocation of risk, rather than discharge of the contract.
Force majeure and hardship clauses must therefore be drafted specifically for the Iraqi Civil Code framework, with careful attention to the distinctions that Iraqi courts draw. Standard international force majeure language, transplanted without adaptation into an Iraqi-law contract, will not perform as the drafter intends.
Geopolitical Risk as a Legal Variable: The US–Iran Dimension
The US–Iran tension in the region has moved from strategic background to operational foreground. Iraq’s position – sovereign territory with deep ties to both actors – means that commercial operations in Iraq are routinely exposed to consequences of decisions made in Washington and Tehran. Regional military activity in February 2026 produced immediate and measurable commercial effects: war-risk insurance premiums rose materially, supplier force majeure declarations increased across multiple sectors, and concerns around LNG supply security became acute. The Iraqi government subsequently invoked a retroactive force majeure with effect from March 2026.
The legal and insurance dimensions of these events are still being resolved. Their commercial lesson is already clear: geopolitical risk in Iraq is not a residual category of risk to be addressed through boilerplate force majeure language. It requires active contractual treatment – sector-specific, legally precise, and calibrated to the Iraqi civil law standard of impossibility rather than the lower threshold of commercial impracticability recognised in some other systems.
Supply chain structuring requires equal attention. Import corridor selection, routing diversification, inventory buffer strategies, and delivery term choices – FOB versus CIF in energy contracts being a representative example – carry legal and operational risk implications that compound in a regional environment of elevated instability. Sanctions compliance analysis must accompany every counterparty due diligence exercise in which there is any conceivable nexus to sanctioned jurisdictions or entities.
Currency Structuring, Documentation, and the SCODA Compliance Reality
The IQD–USD exchange rate at the official level has been stable for contractual purposes. The spread between official and parallel market rates, however, creates exposure for contracts denominated exclusively in US dollars that are subsequently notarised under Iraqi practice – which effectively requires IQD denomination, with USD equivalents incorporated to protect the applicable rate. Contracts that have not addressed this require retrofit, and retrofitting currency provisions after execution is neither straightforward nor without risk.
Iraq’s legal system places exceptional evidential weight on physical documentation: stamped originals, notarised copies, authenticated banking records, and paper-trail evidence of customs clearance and invoice settlement. In a legal system that remains fundamentally paper-based in its enforcement culture, the absence of a document is not merely an inconvenience – it can be dispositive. Comprehensive record-keeping is not a compliance preference. It is the foundation of any claim or defence before an Iraqi court or enforcement body.
Iraq’s adoption of the SCODA customs management system – being implemented progressively across regional clearance points, including the Ibrahim Khalil crossing – adds a further compliance dimension for companies managing cross-border logistics. ASYCUDA World, the UNCTAD-developed customs data management framework that underpins systems of this type, introduces electronic documentation and clearance tracking requirements that align with international standards but require operational adjustment for companies accustomed to less digitalised border procedures. Customs documentation must be structured to meet the system’s requirements from the point of entry, not reconciled retrospectively.
Managing Legal Risk: The Law as Written and the System as Operated
Iraq’s legal architecture is modernising with evident intent. Public Contracts Instruction No. 1 of 2025, the anticipated arbitration law reform, and the progressive roll-out of electronic procurement and customs systems are collectively the most significant structural changes to Iraq’s commercial legal environment in a generation. They are not cosmetic adjustments.
What they require, for foreign operators, is a legal approach that begins with the system as it actually operates – not the law as it appears on the page, but the way Iraqi courts apply it, the way government counterparties experience it, and the way enforcement plays out in a jurisdiction where paper beats assertion every time. Local counsel is not an optional addition to an international team. It is the precondition of effective legal analysis in Iraq.
The companies that manage contractual risk in Iraq successfully are not those that avoid complexity. They are those that have understood, at the outset, that legal certainty in Iraq is earned through preparation, documentation, and structural precision – and that the cost of underestimating the system is, reliably, borne at the worst possible moment.
Iraq does not penalise ambition. It penalises assumptions.
This article is written for informational purposes and does not constitute legal advice. All references to Iraqi law are based on publicly available legal instruments. Companies operating in or entering the Iraqi market should seek jurisdiction-specific legal counsel.
FAQ: Managing Risk in Iraq – What Foreign Operators Need to Know
The most consistent risk is the gap between contractual expectation and operational reality. Iraq’s economy is government-driven, which means performance under most significant contracts depends on the administrative health of the state – ministerial approvals, interagency sign-offs, and fiscal cycles that no contractual clause can fully override.
When Iraq operates without an approved annual budget, public spending reverts to one-twelfth of the prior year’s budget per month. New project spending is not automatically protected. For foreign companies that have already mobilised resources or committed supply chains, this creates a systemic payment interruption with no contractual trigger and no individual government counterparty with authority to override it.
It introduces three mandatory changes: Iraqi governing law is now compulsory for all public contracts, eliminating English or Swiss law elections previously common in large government contracts; template terms are mandatory and cannot be negotiated away; and all public tenders must be managed through a unified electronic procurement platform. Compensation for lost profit on termination is capped at four percent.
Contracts entered into by unregistered foreign companies for services performed inside Iraq are void. This is not a procedural deficiency that can be corrected after the fact – it is nullity, with legal consequences for both parties. Registration is a condition of legal existence, not an administrative formality.
Force majeure under the Iraqi Civil Code requires objective impossibility of performance – not difficulty, cost escalation, or commercial disruption. Hardship applies when performance becomes excessively burdensome due to exceptional and unforeseeable circumstances without becoming impossible. Iraqi courts typically respond to hardship claims by rebalancing obligations rather than discharging the contract. Standard international force majeure language does not perform as intended under Iraqi law without specific adaptation.
Iraq’s position between both actors means that regional military or political escalation produces direct commercial consequences – war-risk insurance premium increases, supplier force majeure declarations, and supply chain disruption. The Iraqi government invoked a retroactive force majeure with effect from March 2026 following regional military activity in February 2026. Geopolitical risk requires active contractual treatment calibrated to the Iraqi Civil Code standard of impossibility, not boilerplate language.
Payment terms must be anchored to verifiable, documented deliverables. Letters of credit, where correctly structured, have provided the most reliable instrument of payment protection. Late-payment provisions must survive Iraqi contract law and notarisation requirements. Banking counterparty risk requires active management – not all Iraqi financial institutions maintain the correspondent relationships needed for efficient cross-border settlement.
Currently, with significant limitations. Iraq lacks a mature institutional arbitration infrastructure comparable to Dubai, London, or Paris. A draft arbitration law aligned with UNCITRAL standards is expected to improve the legislative framework, but legislative reform will not supply institutional competence on its own. Its development will follow investment in legal services and practitioner expertise over years, not months. Until that infrastructure matures, dispute resolution strategy requires careful structuring from the outset.
Ahmad Subhi
As Founding Partner in Baghdad and Managing Partner in Abu Dhabi for Salt & Associates, Ahmad Subhi is recognised for his expertise in private equity, media law, and international arbitration, developed through senior roles at Clifford Chance and Herbert Smith Freehills in London and Dubai. He is well known for advising large institutional investors and UAE government-linked corporates on strategic litigation, arbitration, and complex cross-border transactions. Ahmad has been instrumental in navigating venture capital and media investment structures, leading fund and private equity operations across the Gulf, and representing clients before the ADGM Courts, all UAE arbitration bodies, and the Courts of England and Wales up to the Court of Appeal.
