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اقرأ بالعربية

Legal Risks in Iraqi Energy and Infrastructure Contracts

Energy and infrastructure work in Iraq is mostly contracted by ministries and state companies, under public contracting rules that are mandatory and largely non-negotiable. This article reviews the main legal risk areas for foreign companies: the transition from Government Contracts Execution Instructions No. 2 of 2014 to Public Contracts Execution Instructions No. 1 of 2025, guarantees and penalties, dispute resolution and arbitration after Iraq's accession to the New York Convention, payment delays, workforce rules and tax.

Othman Al-JubooriOthman Al-Juboori, Iraqi lawyer, expert in Iraqi labour lawIraqi lawyer, expert in Iraqi labour law

1. Public contracting rules: from the 2014 to the 2025 Instructions

For more than a decade, contracts with federal government bodies were governed by the Government Contracts Execution Instructions No. 2 of 2014, issued by the Ministry of Planning (Official Gazette No. 4325), together with implementing controls and standard bidding documents.

These have been replaced by the Public Contracts Execution Instructions No. 1 of 2025, issued by the Ministry of Planning and published in Official Gazette No. 4849 on 17 November 2025. Under Article 42 they take effect 90 days after publication, which falls in mid-February 2026. They cover public works, consultancy, non-consultancy services and supply contracts concluded by contracting entities with Iraqi and non-Iraqi parties, and contracts of state companies for projects funded from the federal budget or their own budgets (Article 2/First); contracting entities are required to apply them to contracts above IQD 100 million (Article 38). Three points matter:

  • No retroactive effect. Under Article 41, contracts concluded under the 2014 Instructions remain subject to them, and the 2014 Instructions are repealed from the date the 2025 Instructions take effect.
  • Standard documents and a gap-filling clause. Article 37/First requires contracting entities to apply the standard documents issued by the Ministry of Planning in all contracts covered by the Instructions, and Article 39 requires them to include a clause applying the Instructions to any matter the contract does not address. In practice, the Instructions fill gaps in the contract, and bidders should not expect to negotiate away the standard terms.
  • Iraqi law and courts. Article 37/Third makes public contracts subject to Iraqi law and the jurisdiction of the Iraqi courts, subject to the arbitration option in Article 35.

Under Article 2/Second, the 2025 Instructions do not apply to contracts financed by foreign states or by international, regional or non-governmental organisations under special agreements (unless the agreement applies them); to contracts made by state companies, consultancy offices and government laboratories when they themselves act as contractor, supplier or consultant; or to arms, security equipment and related training contracts of the Ministries of Defence and Interior and the security agencies.

2. Guarantees, advance payments and delay penalties

Key financial terms are set by the instructions rather than by negotiation:

  • Bid bonds and performance guarantees. Under Article 9 of the 2014 Instructions, bid bonds were set at 1% to 3% of the estimated cost, and the performance guarantee at 5% of the contract value, provided after notification of award and before signing. Foreign companies could provide it within 21 days after signing, subject to approvals. The 2025 Instructions (Article 27) keep the 1% to 3% bid bond range and the 5% performance guarantee, in the currency of the contract, provided after notification of award and before signing; the contracting entity's central committee may allow the guarantee to be provided within 30 calendar days of signing and may exempt reputable international suppliers of goods and services from bid bonds (Article 16/Second). Performance guarantees are released only after final acceptance and settlement of accounts, and at the contractor's request the contracting entity may accept a withholding from amounts due instead of all or part of the guarantee (Article 27/Second/d).
  • Advance payments. The 2014 controls treat an operating advance as discretionary for the employer, within the ceilings set by the annual federal budget execution instructions. Contractors should not assume an advance will be paid.
  • Delay penalties. Both sets of instructions require delay penalties of between 10% and 25% of the contract value, with the cap specified in the tender documents and a daily formula based on contract value and duration (Article 28 of the 2025 Instructions). Penalties are reduced in proportion to partial completion, and the head of the contracting entity may defer their deduction at the contractor's request no more than twice.
  • Variations and termination (2025). Under Article 25 of the 2025 Instructions, change orders may not make fundamental changes to the contract or alter its nature, and the contracting entity's power to increase or decrease the contract value or duration is limited to 30%; increases of more than 20% in an item's quantity are priced at prevailing market rates. If the contracting entity terminates without the contractor's consent (other than under Article 31), compensation for loss and lost profit may not exceed 4% of the value of the unexecuted works at contract prices (Article 25/Seventh/d).
  • Suspension and subcontracting (2025). If a suspension ordered under Article 23 exceeds 90 days for works contracts, 30 days for supply and non-consultancy services or 60 days for consultancy, the contracting entity may, within 60 days of the contractor's request, terminate the contract (paying for completed work), resume the work in whole or in part, or omit the affected items. Works contractors may subcontract no more than 30% of the scope, with prior approval and while remaining responsible for the whole contract (Article 18/Fourth).

Because these terms are mandatory, risk management happens mainly through pricing, programme planning, documentation of employer delays and careful use of extension-of-time procedures.

3. Dispute resolution and arbitration

Under the instructions

The 2014 Instructions (Article 8) require an attempt at amicable settlement through a joint committee, then one of the methods specified in the contract: national arbitration under the tender terms or the Civil Procedure Law No. 83 of 1969; international arbitration, which the contracting entity may choose in cases of necessity, for major strategic projects and where one party is foreign, provided an accredited international institution is selected, the seat and language are fixed and Iraqi law is the governing law; or referral to the competent Iraqi court.

The 2025 Instructions (Article 35) keep a tiered approach: amicable settlement through a joint committee, whose minutes are approved by the head of the contracting entity; then a neutral person or body chosen by the parties; and then one of two methods that must be stated in the contract and in the tender documents from the outset, namely arbitration or referral to the competent court. National arbitration follows the tender terms or the Civil Procedure Law No. 83 of 1969. The contracting entity may choose international arbitration in cases of necessity, for major strategic or important projects and where one party is foreign, after obtaining Council of Ministers approval, provided that an accredited international institution is chosen, the seat and language are fixed, Iraqi law is the applicable law, the contracting entity has qualified staff or advisers for the process, and the Ministry of Justice's legal department is notified. Contractors should check, before signing, that the required Council of Ministers approval has actually been obtained; otherwise the arbitration clause may be challenged.

Enforcement: the New York Convention

Iraq acceded to the 1958 New York Convention by Law No. 14 of 2021, published in the Official Gazette on 31 May 2021. The accession was deposited on 11 November 2021, and the Convention entered into force for Iraq on 9 February 2022. Iraq made three reservations:

  1. the Convention does not apply to awards made before the accession law entered into force;
  2. it applies to awards made in another Contracting State only on the basis of reciprocity; and
  3. it applies only to disputes arising from contractual legal relationships considered commercial under Iraqi law.

The third reservation is important for government contracts: whether a particular contract with a state body is "commercial" under Iraqi law may be argued in enforcement proceedings. Domestic arbitration rules remain in Articles 251 to 276 of the Civil Procedure Law; at the time of writing we did not locate an enacted standalone arbitration law.

For investment disputes, Iraq has been a party to the ICSID Convention since 17 December 2015, and Article 27 of Investment Law No. 13 of 2006 allows parties to agree on national or international commercial arbitration.

4. Payment delays

Payment delay is a recurring practical risk on public projects in Iraq, linked to the annual budget cycle, the need for appropriations and approvals, documentation requirements and, at times, liquidity pressure on the state. The law does not remove this risk, but contractors can reduce exposure by:

  • confirming that the project has an approved budget allocation before mobilising;
  • aligning invoicing with the documentation each paying authority requires (completion certificates, committee minutes, tax letters);
  • keeping contemporaneous records of employer-caused delay to support extensions and protect against penalties;
  • using letters of credit or, for larger projects, export credit agency or multilateral support where available; and
  • negotiating, where the instructions allow, clear remedies for late payment and for suspension.

Staff costs continue while payments are delayed. Iraqi labour law obligations to employees, including wages and social security contributions, are not suspended by an employer's payment problems; this is covered in our separate labour-law series.

5. Workforce and labour law

Local-staffing rules apply alongside the contract terms. In federal Iraq, foreign staff need work permits under Instructions No. 1 of 2026 (Official Gazette No. 4863). In 2024 the Council of Ministers decided that private-sector companies and companies contracted with the Ministry of Oil must employ at least 80% Iraqi staff, and the Ministry of Labour has stated that it applies this 80/20 ratio (INA, 3 December 2025; 964media, 28 September 2026); we have not seen the published text of the Cabinet decision, which practitioners cite as Decision No. 24832 of 2024. The ratio to plan on is no more than one foreign worker for every four Iraqi workers. In the Kurdistan Region, Council of Ministers Decree No. 172 of 2022 requires at least 75% local staff. Each foreign worker entering Iraq attracts a work fee of IQD 2,000,000 under Social Security Law No. 18 of 2023 (Article 106), on top of the employer's 12% contribution and the State's 8% share that the employer bears for foreign workers. Article 21 of that Law matters directly for public contracts: an employer engaging a contractor must notify the social security department at least seven days before work starts, the principal and subcontractor are jointly and severally liable for contributions, and state financial departments may not release payments without a social security clearance. See our articles on work permits for foreign workers and social security for employers, and our labour law page.

6. Tax

  • Corporate income tax under Income Tax Law No. 113 of 1982 is levied at 15%, and the tax authority may apply deemed-profit methods to reported revenue.
  • Oil and gas contracts are subject to the 35% rate under Law No. 19 of 2010, which extends to subcontractors in production, extraction and related industries, with withholding at 7% or 3.3% on payments to subcontractors.
  • Kurdistan Region withholding applies under regional instructions (No. 7 of 2022) based on deemed profit by contract type.
  • Tax clearance is commonly required before final payments, release of performance guarantees and deregistration, so unresolved tax files can hold back cash at the end of a project.

7. Other risks worth planning for

  • Registration and licensing performing a government contract triggers branch activity under Regulation No. 2 of 2017; delays in registration can delay payment.
  • Security and force majeure define events, notice requirements and consequences carefully, and align them with insurance.
  • Change in law budget laws, customs and tax changes can affect cost; stabilisation or adjustment clauses are valuable where obtainable.
  • Integrity and compliance Iraqi oversight bodies, including audit and integrity institutions, scrutinise public contracts. Clean documentation of tender procedures, variations and payments is a practical protection.

Frequently Asked Questions

Which instructions apply to my contract?

If the contract was concluded under the 2014 Instructions, they continue to apply to it (Article 41 of the 2025 Instructions). Contracts concluded after the 2025 Instructions took effect in mid-February 2026 fall under the 2025 Instructions.

Can a contract with an Iraqi ministry be governed by English law?

Under both sets of instructions, Iraqi law is required as the governing law of public contracts, including where international arbitration is agreed (Articles 35/Third and 37/Third of the 2025 Instructions).

Will an ICC award against an Iraqi state entity be enforced in Iraq?

Awards made in a New York Convention state after the accession law took effect may be recognised under the Convention, subject to Iraq's reservations (reciprocity and commercial nature) and the Convention's grounds for refusal.

Sources

This article is general information, not legal advice.