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19 July 2018
Due to its status as a commercial hub, Lebanon has its fair share of disputes arising from commercial representation agreements, particularly those concerning compensation for the termination of such agreements. However, while recourse to the court system is well established as the traditional method of settling this type of dispute, significant controversy remains regarding their submission to arbitration.
Decree-Law 34/67, dated August 5 1967, provides the legal framework for commercial representation. It also contains the controversial Article 5, which grants jurisdiction to the Lebanese courts. Article 5 provides that:
"notwithstanding any agreement to the contrary, the Courts of the place where the commercial representative carries out his activity are competent to hear disputes arising from the commercial representation agreement".
As Decree-Law 34/67 was originally promulgated to protect Lebanese agents against foreign entities, its provisions have traditionally been interpreted as a rule of immediate application relating to public policy,(1) thereby making commercial representation disputes inarbitrable.(2) As a result, the traditional approach has been that the Lebanese courts are the only competent forum in which to resolve this type of dispute, to the exclusion of arbitration.
In an attempt to overcome this hurdle, some Lebanese courts have sought an intermediary solution by drawing a distinction between an arbitration clause and a submission agreement. These courts have reasoned that parties to a commercial representation contract may resort to arbitration if they conclude a submission agreement once the dispute arises. In such cases, the parties would previously have knowingly waived their right to the protective measures granted to the Lebanese agent by Decree-Law 34/67; thus, recourse to arbitration to settle the dispute is permitted.
However, when an agreement to submit a dispute to arbitration took the form of an arbitration clause, the courts took the opposite approach. In such instances, they reasoned that the parties – particularly the Lebanese commercial agent deemed to be the weakest party – could not waive their right to the public policy provisions of Decree-Law 34/67 at the conclusion of the contract.(3)
This intermediary approach laid the groundwork for a more liberal approach, whereby the courts overcame the illusory distinction between a submission agreement and an arbitration clause. The courts which recently adopted this liberal approach considered that while the dispute remained the competence of the Lebanese courts in the judicial forum, it did not preclude the parties from agreeing to settle their disputes through arbitration as an alternative forum. The courts held that the exclusive jurisdiction provided under Article 5 of Decree-Law 34/67 was insufficient to prohibit recourse to arbitration and invalidate an arbitration clause.(4)
The courts which followed this liberal approach granted exequatur to arbitral awards without hesitation where the arbitral tribunal had applied the decree-law's substantive provisions to the merits of the dispute. This is best illustrated in Lebanese Trading Distribution v Reynolds, in which the Beirut Court of Appeal granted exequatur to an International Chamber of Commerce arbitral award rendered in a commercial representation dispute. The arbitral tribunal, in the absence of an agreed applicable law to the dispute, applied Lebanese law, particularly Decree-Law 34/67.(5)
In Digital Media v Cable Vision SAL, the courts ruled in a similar liberal vein on the validity of the arbitration clause contained in the parties' commercial representation agreement. This approach was based on the fact that the dispute's subject matter was a request for damages due to the violation of the exclusivity granted to the Lebanese agent and not:
The court considered that the dispute's subject matter was a claim for damages arising from a breach of contractual obligations, which can be subject to settlement outside the framework of the Lebanese courts. These types of claim can be submitted to arbitration, as they do not fall under the ambit of the public policy prohibition of Article 1037 of the Code of Obligations and Contracts.(6)
Further, and most importantly, the court held that Article 5 of Decree-Law 34/67 – which gives the Lebanese courts exclusive jurisdiction to hear these types of dispute – is a special rule that should be interpreted restrictively. Absent an express prohibition, the general principle remains that arbitration is a valid mechanism to resolve disputes under Lebanese law. Based on this case, it is notable that any exception to this general principle must be explicit and cannot be inferred implicitly. The court thus interpreted Article 5 as conferring exclusive jurisdiction on the courts over other judicial state bodies, but not other non-state bodies (ie, arbitral bodies).(7)
This interesting development arguably opens the door to a carve out of arbitration clauses from the scope of Article 5.(8) With this interpretation, Article 5 of Decree-Law 34/67 would therefore apply only to confer jurisdiction to the Lebanese courts when the commercial representation agreement provides for the resolution of disputes in a foreign court. These findings gain further relevance in the context of foreign anti-suit injunctions.
However, such a liberal approach has its limitations. The enforcement of arbitral awards rendered in commercial representation disputes remains subject to the application of the substantive provisions of Decree-Law 34/67. This was recently confirmed in a decision rendered by the Lebanese first-instance court, which denied exequatur to a foreign arbitral award rendered in California on the ground that the commercial representation dispute was subject to Californian law to the exclusion of Lebanese law. In its decision, the Lebanese court emphasised the public policy provisions of Decree-Law 34/67, protecting the Lebanese commercial agent. The court, taking a conservative approach, also based its reasoning on Article 5(2) of the New York Convention, under which an arbitral award can be recognised and enforced only where the dispute's subject matter:
Arbitration of commercial representation disputes has undeniably evolved towards a more liberal approach. However, this evolution remains limited by the public policy nature of Decree-Law 34/67 and the necessity of applying Lebanese law to such dispute. Arbitration practitioners must remain aware of these limitations in order to draft valid arbitration agreements and ensure that any ultimate award will not face considerable obstacles at the enforcement stage.
For further information on this topic please contact Zeina Obeid or Ziad Obeid at Obeid Law Firm by telephone (+961 1 36 37 90) or email (firstname.lastname@example.org or email@example.com). The Obeid Law Firm can be accessed at www.obeidlawfirm.com.
(1) First-Instance Tribunal, Beirut, Decision 117/97, March 27 1997, Rev lib arb, 7, p 52; Diab (Nasri), "Arbitration clause in commercial representation agreements and the new trend in case laws", Al-Adel, 1993, p 522 et s; First-Instance Tribunal, Mount Lebanon, Decision 20/2003, July 31 2003, Gemaco c/ Toyota, Rev lib arb 2004, 30, p 43.
(4) First-Instance Tribunal, Beirut, Decision 149/2914, June 16 1993, Al-Adel 1993, p 267; First-Instance Tribunal, Beirut, Decision 303/2588, December 22 1993, Rev lib arb 1999, 11, p 21; Court of Cassation, Decision 31, February 20 2003, Al-Adel 2006, p 610.
(6) Article 1037 of the Code of Obligations and Contracts states that "it is not possible to settle over issues of personal statutes, of public policy or personal rights that are not within the compass of trade. However, it is permissible to settle over a money interest resulting from a personal status issue or from an offense".
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