Interex Lebanon, Legual Guide to Investments in Lebanon

Lebanon enjoys a system of liberal economy. The Government’s intervention in the private sector is minimal and limited to the prevention of abuse in certain areas.

Trade is generally regulated by the Code of Commerce, which was enacted on 24 December 1942, and subsequently amended on numerous occasions, by certain specific laws.

Any foreign national and legal person may engage in business and professional activities in Lebanon, subject to certain conditions established by law.

The conditions for the exercise of commercial activities will be examined separately according to the structure used.

In Lebanon, commercial activities are exercised either individually or as a collective enterprise.

Every person engaged in business in Lebanon, regardless of his nationality, must file a registration form with the Commercial Register of the Tribunal of the District where he exercises his commercial activities, pursuant to article 24 of the Code of Commerce.

However, the foreign person must first obtain a residency permit, issued by the Department of Public Security, and a work permit, issued by the Ministry of Labor.

Further, article 28 of the Code of Commerce requires every individual, operating a main establishment outside Lebanon, to register every branch office or agency in Lebanon, in the Commercial Register of the Tribunal of the District where the agency operates, within the month following the opening of such branch office or agency.

Finally, a foreigner can acquire a business (fonds de commerce) under the same conditions as a Lebanese person, subject to his personal registration with the Commercial Register which, as indicated above, first requires residency and work permits.

Beside the effective exercise of commercial operations and the registration in the Commercial Register, the individual is subject to other obligations: keeping corporate records validated by the clerk of the Court, submitting himself to the laws of insolvency, bankruptcy, etc.

1) Shareholders: a minimum of three parties is required. Two legal persons may form a joint-stock company, provided there is a third founder, a natural person, who acts as Chairman-General Director.

2) Capital: a minimum of L.L.30,000,000 fully subscribed to is required, with a minimum effective payment of the quarter of said capital (except for certain types of joint stock companies).

a- A minimum of three members and a maximum of twelve is permitted. The majority of the members must be Lebanese citizens, subject to special provisions concerning particular types of corporations.

The term of directors designated in the Articles of Incorporation may not exceed five years, whereas the term of directors elected by shareholders, may not exceed three years (subject to renewal).

b- The Chairman of the Board of Directors may be a foreigner, provided he has obtained residency and work permits in Lebanon. He also acts as General Director, the responsibilities of which he can delegate to an Adjunct Director.

Subject to application of the common law of liabilities, the Code of Commerce provides for a particular form of civil responsibility that may arise out of the administration of the company’s affairs. It contains, on the one hand, a special set of regulations applicable in the event of corporate insolvency, and on the other hand, a general regulation ordinarily applicable in the event of damages resulting from corporate management.

In this latter regulation, the law distinguishes between two categories of cases: one of mismanagement in general, and another, more particular, of administrative mistakes involving fraudulent activities, violations of law or of the Articles of Incorporation.

Responsibility for fraudulent acts, violations of law, or of the Articles of Incorporation (Art. 166 of the Code of Commerce).

All actions undertaken in the course of corporate management expose the directors or their corporate agents to personal liability, notwithstanding the liability imposed on the company. As examples of precise cases of violation of law or Articles, we can mention the following: distribution of fictitious dividends, underwriting fictitious subscriptions, publication of false balance-sheets, misappropriation of dividends and misuse of the company’s assets, ultra vires acts.

A fundamental feature characterizes the liability provided for in article 166. If the action violates legal or statutory regulations, the mere fact of such violation entails liability. Corporate directors are personally liable in the event of these breaches of the law or the company’s Articles of Incorporation; in such cases, proof of the mistake is not required, and such liability is statutory by nature.

If, on the other hand, the act is neither a violation of law or of the company’s Articles, the scope of personal liability is considerably more limited, in such case the burden of proof of the Director’s fault remains with the plaintiff, moreover.

For either ground of liability, the provisions of article 166 are imperative and cannot be contractually waived.

Article 166 Sec.1, refers to the liability of “the directors”, that is, the members of the Board of Directors, i.e., those engaging in managerial activities: the Chairman-General Director, the Managing Director whose responsibilities are also set forth in articles 153, Sec.l, and 155, Sec.3, and the General Director.

The responsible directors are those who were in office at the time the wrongful acts occurred.

The General Director: with regard to wrongful acts attributable to the Board of Directors, the responsibilities of the General Director are the same as those of other directors. In the case of similar acts committed in the course of corporate management, the General Director is not liable to shareholders and third parties. It is the Chairman who is liable to the shareholders and third parties for damages attributable to the General Director’s corporate mismanagement (Art. 153, Sec.l). In this case the Chairman has a right of recourse against the General Director. However, in an action brought by the Chairman against the General Director, the liability “ipso jure” does not seem applicable. The Chairman General Director must prove the fault committed by his representative.

In principle, liability is either individual or joint, depending on whether it involves one director (Chairman-General Director, or Managing-Director) or several members of the Board of Directors. However, in most cases, the director has various levels of responsibility and corresponding liability. Thus, the Chairman General Director, in his capacity as director, will, as other directors, be jointly and severally liable, for all actions taken pursuant to Board resolutions. As for the members of the Board of Directors, the individual responsibility of the Chairman-General Director and the Managing Director, in such capacity, becomes a joint liability to the extent they participate in the management of the affairs of the Company, through the control they exert or through the authorizations they are called to give in certain cases.

The principle of collegiality will almost fully come into play. The liability for actions taken by the Board of Directors will be incumbent upon each of its members, even if they had been decided with the vote of a majority. Article 170 provides for only one exception: directors who have taken exception against the resolutions adopted by the Board and who have ensured their protest is set forth in the relevant Minutes.

Liability for mismanagement (Art. 167 of the Code of Commerce). Generally, errors in management can be either of fraudulent nature and violations of the law or of the Articles of Incorporation, as discussed above, or mistakes outside of these categories, i.e., errors committed in the regular conduct of the Company’s business.

The sanction for (negligent) mismanagement by the directors may lead to a full reparation of the damage suffered, in conformity with the common law. It is, however, different from the sanction related to the case of Art. 166 (fraudulent), in that, on the one hand, there are more grounds of liability, and on the other hand, the conditions for liability are different.

As for the conditions, the burden of proof is on the plaintiff to show liability for mismanagement.

With regard to personal liabilities, individual or joint, they are the same as those relating to the liability referred to in article 166.

4) Nationality: Lebanese in order to have the company’s registered office in Lebanon.

5) Auditors: An auditor designated by the ordinary General Meeting and an auditor appointed by the president of the Commercial Court. These auditors may be reelected every year.

6) Articles of Incorporation: they must be notarized and recorded before the Commercial Register, together with the Minutes of the first General Assembly and the Board of Directors electing the Chairman-General Director.

1) Shares: these may be in bearer form or nominative, depending on the provisions of the company’s Articles of Incorporation, except for certain specific provisions proper to all joint-stock companies (qualification shares of directors inevitably nominative) or to certain types of joint-stock companies.

2) Bonds: these are negotiable instruments, indivisible, of an equal nominal amount, which cannot be issued until payment in full of the capital contribution. The bonds could be convertible into shares by decision of the extraordinary General Assembly.

3) General Assemblies: they may be constituent, ordinary, or extraordinary. Each share gives right to one vote, except for double votes reserved for shareholders holding shares for at least two years.

The extraordinary General Assembly deliberates on all issues of amendment of the Articles. However, it cannot change the company’s nationality, increase the obligations of shareholders or undermine third parties’ rights. Decisions are made by a two-thirds majority of shareholders present or represented.

A shareholder can be represented at the meetings of the General Assembly only by another shareholder.

Representatives of debenture-holders attending the General Assembly’s meetings cannot vote.

4) The Board of Directors has the most extended powers to carry out the resolutions of the General Assembly and to engage in all such operations as they constitute part of the management of the business of the company and which are not deemed to constitute decisions of a daily operational nature. The limitations and restrictions of these powers are set by law or in the Articles of the Company.

The Board must convene the ordinary General Assembly at least once a year for approval of the accounts, the delivery of the auditor’s full discharge to the directors etc.

Also, the Board must convene the ordinary General Assembly to renew the directors’ term or elect new directors.

6) Liability of shareholders: shareholders are liable for the debt of the company only to the extent of their capital contribution.

Dissolution of the corporation normally occurs at the expiration of the term of the corporation’s life as fixed by the Articles.

Dissolution before the end of term year is either voluntary, by decision of the extraordinary General Assembly, or mandatory in case of loss of three-fourths of the capital, subject to a special deliberation of the extraordinary General Assembly contemplating other remedies, or by decision of the Court.

1) Partners: a minimum of three and a maximum of twenty are permitted. They can all be foreigners.

2) Capital: a minimum of L.L.5,000,000 is required, fully subscribed to and paid for by the time of its organization.

3) Management: the manager(s) may be designated in the Articles of Organization or appointed by a decision of the partners. Partners may be foreigners, provided that they obtain work and residency permits.

4) Nationality: Lebanese in order to have the company’s registered office in Lebanon.

6) Articles of Organization: they must be notarized or signed before the clerk of the Commercial Register where they are filed.

1) Company’s “shares”: they are nominative shares of equal value, distributed to the partners in proportion to their respective subscription. These shares can be transferred only among partners or by succession, to their heirs.

The transfer to a third person is subject to the company’s priority right of redemption, failing which, that of the partners. The transfer should, in any case, be approved by partners representing at least three-fourths of the company’s capital.

It is held at least once a year and is called by the manager. Unless otherwise provided in the Articles, a partner can appoint only another partner to represent him.

Decisions are taken by majority of the votes present or represented, except for amendment of the Articles, which requires a majority representing three-quarters of the capital.

3) Management: there may be one or more managers, whether partners or not, designated in the Articles or by subsequent written agreement, for a limited or indefinite term. The foreign manager must hold work and residency permits.

The manager enjoys all necessary prerogatives to manage the business of the company unless otherwise provided in the Articles. He can be removed ad-nutum (by decision of the partners’ meeting or by a Court order, when a valid reason justifies such removal).

4) Liability of the partners: partners are liable for the company’s debt to the extent of their capital contributions only.

Liability of the manager: he is personally liable to the company and third parties for acts of violation of the law, of the company’s Articles, and for gross mismanagement.

Dissolution normally occurs at the expiration of the life of the company as set forth in the company’s Articles.

Early dissolution is either voluntary, by decision of the partners representing three-fourths of the capital, or mandatory, subject to the partners’ decision contemplating other remedies and this, in case of loss of three-fourths of the capital. Earlier dissolution can also be decided in Court.

Limited partnership and limited partnership by shares (société en commandite simple et par actions).

3) The provisions relative to the organization of General Partnerships are applicable to General Partners.

Also, the rules applicable to joint-stock companies apply to limited partnerships by shares or partnership “in commandite” by shares.

These are comparable, depending upon the cases, to those of general partnerships or joint-stock companies.

Management: it is the responsibility of the general partner(s), who is/are personally liable.

A limited partner cannot interfere in the company’s management at the risk of becoming liable as a general partner.

2) Company’s name: all the names of the partners, followed by the terms “et Cie”.

4) Partnership Agreement: notarized or signed before the Clerk of the Commercial Register where it should be filed.

Partners are personally liable for all partnership debts. As such, they jointly manage the business of the partnership unless otherwise provided in the partnership agreement.

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Dissolution occurs at the expiration of the partnership term, the conclusion of the contemplated purpose, or the disappearance of the purpose for which the partnership was organized.

Furthermore, the court may always be called upon to declare the dissolution of the partnership at the request of one partner, if the partnership is for an indefinite duration or in the event of bankruptcy or incapacity of a partner. However, in the event of death of a partner, the partnership continues with the surviving partners, unless otherwise provided in the partnership agreement, as partnership “in commandite”, with the defunct partner’s heirs becoming limited partners “commanditaires” .

It is deemed to exist only among the parties entering into such an arrangement. It is not deemed to be a recognized legal entity.

The Agreement freely determines the relations between the parties, subject to the application of the general principles of contract law.

Such entity is not subject to the requirements of publication prescribed for other companies.

The holding company, invariably a joint-stock company, is subject to the same rules of organization as a joint-stock company, except for the following provisions:

1) Acquisition of shares in existing Lebanese or foreign joint-stock companies or limited liability companies, or participation in their organization.

3) Granting loans to companies in which it holds shares and standing security for these companies for the benefit of third parties. The holding company may, for this purpose, take out loans from banks and issue debentures in accordance with the provisions of article 122 and subsequent articles of the Code of Commerce, provided the total value of the debentures issued never exceeds five times the value of the capital of the holding company, plus the reserves as shown on the most recently approved balance-sheet.

The holding company cannot grant loans to companies operating in Lebanon if its share in their capital is less than 20%.

4) Acquisition of patents, discoveries, concessions, trade-marks and all other reserved rights, as well as their licensing to companies operating in Lebanon or abroad.

5) Acquisition of real or personal property, provided it is for the exclusive needs of the holding company and in accordance with laws relative to acquisitions by non-Lebanese citizens of real property in Lebanon.

C- Capital: it may be fixed in foreign currency. The same applies to the company’s accounts of all types.

D- Board of Directors: it should be composed of at least two Lebanese directors; the others, whatever their number, may be foreigners.

The foreign Chairman-General Director is not required to hold a work permit if he is a non-resident.

The meetings of the Board of Directors and shareholders may be held outside Lebanon, by special provision in the Articles, except for the annual ordinary General Meeting, which is convened in Lebanon, no later than five months from the end of each financial year.

E- Registered Office : The registered office is located in Lebanon, where the accounts are held. However, the company may elect domicile with a natural or legal person.

F- Financial system: financially, the holding company is subject to the system of “presumptive assessment” which is more fully explained below, under the heading of “Taxation”. However, it should be noted that this system allows the company to avoid the taxes levied on corporations in exchange for a symbolic presumptive assessment.

G- Sanctions: in the event the holding company engages in activities other than those it is authorized for, it becomes subject to the same tax rates as applied to the stock companies operating in Lebanon, and to a fine amounting to an additional amount of tax equal to 20% of the basic tax, or equal to 3 per thousand of the capital of the company, (including surplus fund), whichever is higher.

Like the holding company, this entity needs necessarily to be organized in the form of a joint-stock company. All rules of organization and operation relative to joint-stock companies are thus applicable, except for the following provisions:

1)- Negotiation and signature of agreements and contracts relating to operations and transactions that will be implemented outside Lebanon and relating to merchandise and materials located abroad or in the Lebanese customs-free zone.

2)- Use of the facilities available at the customs-free zone to warehouse the imported merchandise for re-exportation, leasing of offices in Lebanon and acquisition of real property necessary to its activities in accordance with the provisions regarding acquisition by foreigners of property rights in Lebanon.

3)- Preparation of studies and consultations that will be used outside Lebanon, and this, at the request of the establishments located abroad.

4)- Engaging in financial, banking and brokerage services and activities that will be implemented outside Lebanon.

B- Board of Directors: like the holding company, it shall be comprised of at least two Lebanese directors; the rest of the members, whatever their number, may be of foreign nationality.

A foreign Chairman-General Director is not required to hold a work permit, if he is a non-resident.

D- Financial system: the company is subject to a symbolic presumptive assessment exempting it from the tax on income. Details are set forth under the heading of “Taxation”.

E- Sanctions: in the event the company engages in activities not authorized, it becomes subject to the same tax rate affixed to stock companies, increased by a penalty equal to 50% of such tax.

Foreign companies operating in Lebanon are subject to registration requirements which vary according to the form of the company.

These companies are required to register with the Commercial Register in the district in which their subsidiaries or agencies are located. Also, they must register before the Patent Office of the Ministry of National Economy and Commerce.

(2) The original or a copy of the Articles of Incorporation or Organization of the company.

These documents must be certified as true by the Board of Directors and legalized by the competent authority of the company’s head office. These companies must also designate an agent who will thereby be empowered to negotiate and sign any agreement relating to the company’s operations provided in the Articles, and to represent the company before the Courts of all jurisdictions as plaintiff, defendant or in any other capacity.

Two months from the date of filing of the documents listed above, and after payment of the appropriate fee, the Patent Office issues a certificate stating that the foreign company has completed the formalities required.

Any modifications of the Articles, increases and reductions in capital and replacements of proxies must also be filed with the Office. Corporate mergers and declarations of bankruptcy must also be brought to the attention of the Office in like manner. A certificate of the declarations will be delivered.

Until these declarations are filed, the company is not entitled to take advantage of the modifications brought about to its Articles and of other changes referred to above, vis-a-vis, either persons who have dealt with it or third parties.

If a foreign company’s principal operations are financial, it must remit to the Office, within three months from the end of the company’s fiscal year, the documents reflecting their situation in accordance with the balance sheet of the previous year. These documents will be certified true by the company’s manager.

The names of all partners, except shareholders and limited partners, as well as the date, place of birth and nationality of each.

The registered office of the company and the office of the subsidiary or agency.

The names of the persons authorized to administer, manage or sign on behalf of the company.

In addition, all amendments to the Articles, increases and reductions in capital, and replacements of proxies must be filed with the Commercial Register. Corporate mergers and declarations of bankruptcy must similarly be brought to the attention of the Register. A certificate is issued, stating that the formalities have been met.

They must register their branch or agency at the Commercial Register of the district in which the relevant establishment is located.

The foreign company’s agent must file an excerpt of the company’s articles of association together with two copies of a form indicating:

The names of the partners or third persons authorized to manage, administer or sign in the name of the company.

Although there are no special legal provisions in this regard, it is certain that Lebanon, recognizes the legal validity of foreign companies of whatever type, so long as they are duly organized in accordance with the laws of their country of origin. This is implicit in many legal provisions, in particular those regulating the publication, by registration, before the Commercial Register of said companies and of their branches or agencies in Lebanon. It does not matter that it is a type of company not known under the Lebanese system. However, it goes without saying that the matter should concern companies that already constitute legal personalities under the foreign law to which they are subject. This is how English companies, in the form of partnerships (as opposed to the “incorporated” form), cannot be recognized as legal persons in Lebanon, because, according to their national law, they do not enjoy such legal personality. A foreign company whose incorporation requires a government approval, but from which such approval has then been withdrawn, cannot be recognized in Lebanon. The same applies to companies that have been nationalized in their country of origin. This recognition of foreign companies is subject to public policy, both regarding the recognition of the company itself (in particular, companies whose incorporation under foreign law is contrary to Lebanese public policy) and regarding the effects, in Lebanon, of measures taken against foreign companies, such as measures of nationalization without compensation. Thus, real estate located in Lebanon and having been the property of nationalized companies, will not be attributed to the foreign Government.

In principle, the full possession of civil rights in Lebanon is recognized as a right of legal and natural foreign persons, provided their enjoyment of such rights is recognized in their country of origin. In this respect, there is only one restriction relating to real property (see the relative heading).

In the matter of corporations, the rule that every foreign company is governed by the law of the country in which it is formed is only a transposition of the principle of conflicts of law whereby the personal status of individuals is governed by their national law. The only variation is that, in view of the difference in nature between a natural and a legal person, the notion of personal status is different in one case compared to the other; it is much wider in the latter as opposed to the former. The status and capacity of individuals correspond to the formation, organization and mode of functioning of companies.

Thus, we apply the foreign law, both in its provisions of common law as well as its provisions relative to the formation of the companies, to determine for instance, the amount of the company’s capital, its division of shares, the conditions of subscription, the form of shares, their nature, their applicable rights and obligations, their mode of transfer, etc.; with respect to its organization, to determine the means of deliberation (assemblies), administration, control, etc.; with respect to its functioning, to determine the methods of functioning of the various bodies, their competence, the role the partners can play individually, the rights of creditors, etc.

It is also by applying the foreign law that the civil or commercial character of a corporation can be determined.

In accordance with general principles of conflict of laws, foreign provisions contrary to domestic public policy are of no effect in Lebanon. In such cases, the equivalent domestic provision is substituted for the foreign provision.

At issue is public policy in the sense of international law, and not domestic law. As such, most of the provisions regulating joint-stock companies are, in the domestic sense, mandatory and of public policy order; nevertheless, they do not circumvent the corresponding provisions of the foreign laws, which are the only ones applicable.

However, certain provisions of national law are so fundamental that application of conflicting foreign provisions would constitute a breach of the public policy of the country. This is the case, for instance, of the rule which prohibits unconscionable clauses (clause leonine) or that which declares null a contract if its purpose is illicit. As a result, foreign provisions which otherwise are applicable, in principle, to foreign companies which do not prohibit unconscionable clauses or an illicit contractual purpose in the same manner will be excluded.

In a more general way, Lebanon has laws and institutions with a strictly territorial character, applicable to companies albeit foreign. It is, without any doubt, the idea of public policy. Said laws are thus territorial precisely because they constitute a matter of public policy. This is the case of criminal laws, enacted by the Code of Commerce, reprimanding certain activities of companies’ representatives that correspond to acts provided for in the Penal Code (forgery, fraud, bankruptcy) or that constitute a crime sui generis (distribution of fictitious dividends, omissions of certain publication requirements, formalities, etc.).

The same rule applies to provisions regulating bankruptcy; such provisions are essentially territorial and constitute a matter of public policy. A foreign company in a situation of bankruptcy under the laws of the country in which it operates, is subject to the procedures of the latter’s laws. On the other hand, and because of the narrow relationship between the bankruptcy and the bankruptcy reorganization (preventive concordat), we believe we must admit that a foreign company having discontinued its payments in a country that recognizes the latter institution, like Lebanon, will benefit from it while its fate is not known in the country of origin of the company.

The Lebanese law, as regards commercial representation, presents a particular interest to foreign businesses or companies since most of such agreements of commercial representation are concluded between foreign companies acting as “principals” and Lebanese traders as “agents”.

A special legislation (*), vested with a public policy character, was introduced on the subject by the promulgation of Decree No. 34 of 5 August 1967, amended by Decree No. 9639 of 6 February 1975 and Decree No. 73/83 of 9 September 1983.

This Decree applies solely to contracts of commercial representation to the exclusion of all other forms of commercial transactions, such as contracts on commission and brokerage agreements.

The commercial representative is defined, by the above Decree, as an agent, who, by virtue of his usual and independent profession, undertakes negotiations for the conclusion of operations of sale, purchase, lease or performance of services, and, if necessary, carries on such activity in the name of the represented parties and for their account.

The Decree recognizes as a commercial representative any person or entity who sells for his own account merchandise which he has bought pursuant to a contract appointing him exclusive representative or distributor.

As such, the commission-agent differs from the commercial representative in that the former acts in his own name and for the account of the actual purchaser, in consideration for a commission.

A broker is one who, in consideration for a remuneration, either brings to the attention of another party an opportunity to conclude a transaction, or acts as intermediary for the negotiation of a contract. The broker also acts in his own name.

The legal characterization of the contract is a matter for the court to decide, in light of the terms used by the parties in drafting the contract. This qualification is based on the characteristics of the contract of commercial representation discussed below.

Finally, Decree No. 34 further stipulates that, subject to the principles of reciprocity which a foreign agent must show, in order to benefit from this legislation the commercial representative must be a Lebanese national and must have commercial premises in Lebanon. If the agent is a company:

For general partnerships and limited liability companies: the majority of partners must be Lebanese, the majority of the capital must belong to Lebanese persons, and finally, the manager of the partnership or company must be a Lebanese national.

For joint-stock companies: the majority of shares must be nominative, the majority of the capital must be owned by Lebanese persons, two-thirds of the members of the Board of Directors, as well as the General-Manager or the person delegated by the Board’s Chairman or by the General Manager to discharge all or certain duties of management, must be Lebanese nationals.

The exercise of the representation on a professional basis is one of the principal aspects that distinguishes the contract of commercial representation from the one of ordinary commission, the commission-agent acts in the name and for the account of the principal for only one or some isolated activities.

The commercial representative should be engaged in commercial activities on a regular basis; he remains free to engage, for his own account, in commercial activities other than those subject to his/ her representation. In addition, he can have different representations, so long as no conflict of interest arises and provided that no competitive goods are involved.

The contract of commercial representation may include an exclusivity clause in favor of either the representative or the principal, or both.

This clause may be of a different scope, it may apply to all or certain products, it may be extended to all regions or be limited to a specific city or area.

On the other hand, the exclusivity clause may apply only to luxury goods. According to Decree No. 2339 of 6 April 1992, products not considered luxury goods/items are:

food products for human and animal consumption, detergents and cleaning products.

The commercial representative cannot be bound by an employment contract with the principal.

On the other hand, he can designate his own representatives, hire employees and set their commissions or remuneration.

The trade representative is independent in the organization of the activities pertaining to his representation. He is only required to advise his principal of the results of the operations he concludes.

However, the principal may give the representative simple instructions and guidelines. This will, in no way, deprive the contract of its character of commercial representation.

The contract of commercial representation must be in writing. The contract may be either a notarized document or a private agreement.

On the other hand, in order for the exclusivity clause to be enforceable against third parties, the Decree expressly requires that it be filed with the Commercial Register.

It should also be noted that a Special Register was created by the Ministry of Economy and Commerce for the filing of such contracts of commercial representation.

The representative is entitled to a remuneration which, most often, takes the form of a percentage of commission. The agent has the right to such compensation regardless of whether the contract concluded with third parties under the commercial representation agreement is performed by them, unless the agent is at fault, or unless otherwise agreed.

In return, the representative must carry out his representation with the diligence required of a salaried gent.

Therefore, the commercial representative will be liable to the principal for all mistakes committed during the course of execution of the contract.

However, limitations and exclusions of liability clauses are accepted, except in the event of fraud or of serious mistake.

The agent is also required to apprise the principal of the fulfillment of his mission. This appraisal should not, however, be incompatible with the independence of the representative in carrying out his representation.

Active and passive results of the actions taken in accordance with the contract of commercial representation are produced by the principal. However, the commercial representative can conclude a “Convention de Ducroire” with the principal, whereby he assumes liability to the latter for actions by the parties with whom he signed the contract.

In his relations with the agent, the principal is required to pay the remuneration agreed upon as well as the deposit fees, delivery, transportation and other fees incurred by the representative. The principal must also provide the agent with all necessary information relating to the representation.

The contract of commercial representation is terminated for the same grounds as a commission contract, namely, the death of the principal or agent, impossibility of carrying on the purposes of the contract for a reason beyond the control of the contracting parties, change in the status of either the agent or the principal such as bankruptcy, cancellation of the contract by either the agent or the principal, etc.

However, the contract of commercial representation has been qualified by Decree No. 34 as an agreement entered into for the joint interests of the parties, and a right thus of indemnification was recognized for the agent in the following two cases:

1) In the event of termination of the contract by the principal without any lawful reason “cause” and in the absence of any mistake on the part of the agent. In this case, it matters little whether or not the duration of the contract is determined.

2) In the event of the principal’s refusal to renew the contract of commercial representation upon expiration of its term without any lawful reason “cause” and in the absence of any mistake on the part of the representative.

In the first instance, i.e., in the event of unilateral termination by the principal, the amount of the indemnity must correspond to the damage suffered and the profit lost by the agent.

The right to an indemnity is a matter of public policy, and therefore, any agreement to the contrary between the parties is null and void.

In the second case, i.e., in the event of the principal’s refusal to renew the contract, the principal will be liable for payment of an indemnity to the agent when the latter’s activities had resulted in a measurable success in promoting the business of his principal or in increasing the number of his customers.

The indemnity which will be determined by the Court should cover the profit that the representative would have made from promoting the principal’s trademark or from increasing the number of his customers, or both.

The indemnity is also a matter of public policy in this case, and any clause excluding or lowering its amount will be invalidated.

In order to evaluate the indemnity for lost profit, the courts will, as a general rule, consider the average of the annual net profit realized over the last five years prior to termination or to refusal to renew the contract of representation, and multiply it by a margin of “three”.

there is a lawful reason (cause) for termination or refusal to renew the contract.

The agent’s breach will often consist of the violation of its contractual obligations (representation of competitors, insufficient activity...).

Lawful reasons, which are determined by courts in their sovereign capacity, may assume various forms. Thus, the change in the person of the agent who became partner in an unlimited partnership or the death of the agent or exclusive distributor have been considered lawful reasons for termination or refusal to renew the contract. These reasons were derived from the particular nature of the contract of commercial representation, being one concluded intuitu personea.

However, any reason beyond the agent’s control, such as economic conditions of the country or reorganization of the representation by the principal, is not deemed to be a lawful reason for termination or refusal to renew.

Moreover, legal provisions exist to facilitate enforcement of the judgments rendered in favor of the agents and to prevent the condemned principals from being represented by third persons before enforcement of the judgment.

A Special Register was created for this purpose at the Ministry of Economy and Commerce, as mentioned above, for the filing by all parties having concluded representation contracts with Lebanese agents and parties against which a lawsuit was brought in conformity with the provisions of Decree No. 34, parties against which a final judgment was rendered in accordance with the above Decree.

Also, specific mention is required of the final judgment rendered against these entities and of the legal proceedings brought pursuant to Decree No. 34.

In such case, the new representative will not be able to represent said party in Lebanon. During a three-month period dating from the delivery of a final judgment against such party, this new representative will be required either to execute the said judgment in the place and for the account of the liable party, reserving his right of recourse against the latter, or to definitively relinquish the representation and accept the removal of his contract from the Commercial Register.

With regard to the company against which a binding judgment has been rendered, it will be barred from being represented in Lebanon so long as it has not, either on its own or through its new representative, carried out the judgment against it as described above.

Finally, the prior representative is required to notify the customs authorities of the final judgment of condemnation so that the imported merchandise, manufactured by the condemned party, will not be cleared by customs until the recordation of satisfaction of judgment.

Conflicts of law are very important in this topic because of the international nature generally attached to contracts of commercial representation concluded with foreign merchants and manufacturers, and hence the applicability of different laws to these contracts.

The principle of private international law accepted in contractual matters is to apply the law chosen by the parties to a contract, except in the event of public policy directly applicable to a specific contractual situation.

The provisions stipulated in Decree No. 34 regulating commercial representation in Lebanon are imperative and a matter of a public policy. They essentially aim at protecting Lebanese agents exerting their activities in Lebanon. It follows that these provisions apply imperatively to contracts concluded with said representatives.

The applicability of Lebanese law in the area of commercial representation is accompanied by the competency of Lebanese courts; such jurisdiction is expressly provided for in article 5 of Decree No. 34.

Article 5 of Decree No. 34 expressly provides that, notwithstanding any agreement to the contrary, the courts of the district in which the commercial representative exercises his activity are competent to adjudicate disputes arising from the contract of commercial representation.

As a result, only Lebanese courts are competent to try cases arising from contracts concluded with agents engaging in commercial activities in Lebanon.

Moreover, such judicial competency recognized to Lebanese Courts applies whatever the parties’ nationality may be.

It is worth mentioning that the Lebanese jurisprudence is divided on the issue of validity of arbitration clauses inserted into contracts of commercial representation.

In fact, the Lebanese Supreme Court, considered in a 1988 ruling that the above mentioned article 5 only determines the competent jurisdiction and does not extend to arbitration. The latter remains, thus, subject to the principle of contractual freedom. This jurisprudence was adopted by a decision rendered in 1992 by the Court of First Instance in Beirut.

However, certain other Lebanese courts deemed null arbitration clauses because of the public policy nature attached to the competency of Lebanese courts in this area, resulting from article 5 itself. These courts further considered that it would be a violation of the law to submit to arbitration rights, such as those resulting from a contract of commercial representation, that could not be the subject of transactions, due to their public policy character. This position was adopted by the Supreme Court in a decision rendered in 1998.

However, the fact remains that Lebanese courts, in general, deem the arbitration stipulated in a contract of commercial representation to be valid if authorized by a Convention or a Treaty concluded between Lebanon and a foreign country of which the principal is a national. Such jurisprudence essentially finds its grounds in article 2 of the Civil Procedure Code which explicitly recognizes the supremacy of international Conventions over provisions of domestic law in the case of conflict between them.

(*) protecting the Lebanese representative or agent.

BUSINESS MANAGEMENT

Decree No. 11 of 11 July 1967 contains provisions relating to management of the business establishment and certain business activities. In this chapter we will address only the contract of business management or rent management of the business establishment.

I- Definition of the business establishment - Differences between a management contract and a contract of business management, or rent management of a business establishment -The usefulness of the contract of business management.

The business establishment is defined by the above decree as the instrument of the commercial enterprise, mainly constituted by incorporeal elements (such as the title to lease, custom, goodwill...) and, by way of accessories, by corporeal elements (such as merchandise), the grouping and organization of which aim at the exercise of a trading profession which is not of a public nature.

The Decree further provides that absent an indication to the contrary either by an entry on the Commercial Register or by a clause in the business contract, the business is deemed to include the business/corporate name, the sign, title to lease, custom and goodwill.

The business establishment can be the object of all kinds of legal relationships. These legal relationships are governed by special laws relative to each subject, and by general principles of law.

Further, Decree No. 11 applies to four types of contracts relating to the business establishment: sale and transfer, pledging, contribution and business management or rent management.

The differences between a management contract and a contract of business management or rent management of the business establishment are worthy of note.

A management contract is one in which the owner of a business establishment entrusts the operation of the establishment to a third party, who acts in his name and for his account. The contract so concluded with a third party may be, depending on the case, either an employment agreement, or an agency agreement.

However, a contract of business management is one in which the business establishment is confided to a manager who exploits it for his own account.

The usefulness of this type of contract is illustrated when, for instance, the succession of a business establishment falls on someone incapable of trading, or someone in a profession inconsistent with the trading business, or when the owner of the business establishment wishes to retire. On the other hand, some persons could be interested in exploiting a business establishment without, however, possessing the necessary capital to create or acquire one.

In addition to Decree No. 11, contracts of business management are governed by the rules relating to leasing and licensing set forth in the Code of Obligations and Contracts (Civil Code). Article 533 of this Code expressly authorizes the leasing of rights, meaning intangible movable properties such as the business establishment.

Finally, it should be noted that Lebanese legislators did not provide for any renewal of management contracts and contracts of business management in the new law on leases of immovable properties No. 160/92 of 23 July 1992, as had previously been done in accordance with law No.22/83 of 26 August 1983.

II- Character of the contract of business management.

A- With regard to the tenant-manager, the business management contract constitutes an act of trade all by itself, because on the one hand, it aims at accomplishing other trading activities through the said act, and on the other hand, it provides the tenant-manager with the trader’s quality as stated in Decree No.11.

B- With regard to the lessor, the contract often, but not always, constitutes an act of trade:

1) If the lessor has exploited the business establishment himself, the contract of business management will be considered as an incidental act of trade.

2) If the lessor has not exploited the business establishment himself, the contract will be considered as a trading act if (i) he acquired the business establishment to resell it or to rent it, and (ii) the lessor set it up, but there has not yet been effective exploitation. On the other hand, if the establishment has been acquired through donation or inheritance, the contract of business management is of a civil nature with respect to the lessor.

III- Substantial, formal and publicity requirements of the contract of business management.

A- Substantial requirements.

1) The tenant-manager must have the capacity to carry out commercial activities because the contract of business management confers on him the quality of merchant.

2) The lessor must be the owner of the business establishment or be appointed by the owner for purposes of concluding the contract. A receiver in bankruptcy of the establishment’s owner may also give the establishment away for business management under Court authorization, based on the report of the magistrate-receiver, if it is in the public’s or the creditors’ interest.

3) The contract may cover all the elements of the business establishment or only a portion thereof. Exploitation of the business establishment must always have a lawful purpose and be in accordance with public policy.

It should be noted that when a clause forbids the sublease or the assignment of a lease to the premises where the business establishment is exploited, such clause cannot be validly invoked by the owner of the premises against the lessor or the tenant- manager, because the contract of business management does not constitute a sublease or an assignment of a lease, but the lease of movable, incorporeal, property which is the business establishment.

Further, the owner of the premises may not claim the benefit of a priority right, since such benefit arises only from transfer of the business establishment and not from a contract of business management of the establishment. However, the owner of the premises may, pursuant to article 16(2) of the law No. 160/92 of 23 July 1992 regarding leases of immovable property, claim a fair rent if the lease is part of the elements of the business management, and this during the whole term of management.

B- Formal requirements.

The contract of business management must be in writing.

In the absence of a writing, the existence of a contract may be established by testimony under oath and if so established, it is enforceable.

C- Publication requirements.

1- Publication requirements at the date of formation of the contract are as follows:

a- The contract of business management must be published, within two weeks/fifteen days of its execution, in the Official Gazette and in a daily newspaper of the district in which the establishment lies.

b- Within the same time frame, the contract of business management must be registered, in a special Commercial Register of business establishments, under the name of the owner of the establishment if he is a merchant, and necessarily under the name of the tenant-manager. In addition to entailing the payment of a penalty for failure to publish, the contract, if not registered, is not enforceable against third parties.

The judge to whom the matter is referred will order that the omitted publication be made within fifteen days, failing which, a second fine will be levied.

2) Permanent publication:

The contract of business management must be the subject of a permanent publication in which the tenant-manager is required to indicate, at the top of all documents addressed or remitted to third parties in the course of his trade, his capacity as tenant-manager as well as the place (district in which the establishment lies) and the number of his registration on the Commercial Register, under penalty of a fine and liability for all damages to third parties which may result from such omission.

3) Publication required upon termination of the contract:

a- Termination of the contract of business management must be published within fifteen days from its termination in the Official Gazette and in a newspaper of the district in which the establishment lies.

b- Within the same time frame, termination of the contract must be published in the Commercial Register.

4) Publication in the event of tacit renewal of the business management:

This publication is required only when the tacit renewal clause in the contract was not published with the contract.

IV- Effects of the contract of business management.

A- Effects of the contract between the parties.

1- Effects on lessor:

a- The lessor loses the quality of trader unless he continues to carry out a commercial activity. He should, however, maintain his registration at the Commercial Register by mentioning the business management of his business establishment.

b- The lessor can claim the rent of the business management on the date fixed in the contract.

c- The lessor may always, either transfer the business establishment or pledge it. The business management remains in effect with regard to the transferee or the pledgee, unless otherwise provided in the contract of business management.

d- The lessor must deliver the business establishment to the tenant-manager with all its real and incorporeal assets, unless otherwise provided in the contract.

e- The lessor is bound by an obligation to maintain the business establishment in good repair, and he must make all reparations necessary to keep the establishment in the same condition as it was at the time of conclusion of the contact, failing an express stipulation to the contrary. In the event of default on the part of the lessor, the tenant-manager may undertake the repairs himself, and withhold the cost thereof from the rent.

f- Finally, the lessor must provide warranties to the tenant-manager.

Warranty against defects:

The lessor is responsible for all hidden defects that noticeably affect the exploitation of the establishment. With respect to apparent defects, he is liable only if he had declared them non- existent.

The lessor’s responsibility ceases in the following cases:

In the event he had declared the defects to the tenant- manager.

In the event the tenant-manager knew about the defects at the time of execution of the contract.

In the event the contract, either expressly or implicitly, provides for the absence of warranty.

It should be noted that in the event of liability on the part of the lessor, the tenant-manager may ask either for termination of the contract, or for a reduction in the rent.

Warranty against the lessor’s facts:

The lessor warrants that he will abstain from any competitive activity.

This warranty may result from an undertaking not to set up a competing business, expressly stipulated in the contract, in which case it must be limited both in time and space.

In the absence of such a contractual clause, the lessor remains bound to the legal obligation of not competing. In the event the lessor creates a new business establishment or participates in the exploitation of an existing one, the lessor must abstain from attracting clients of the previously leased establishment.

Warranty against third parties:

The lessor is required to guarantee the tenant-manager against any nuisance to or eviction of the latter, in all or part of the establishment, as a result of an action involving either the property itself or a real property right attached to it. Consequently, the lease will be terminated or the rent reduced, depending on whether the deprivation is total or partial. In all cases, the tenant-manager will recover damages covering the damage suffered and the profit lost.

2- Effects on the tenant-manager:

a- The tenant-manager has the capacity of a merchant. As such, he is subject to all the traders’ obligations (registration at the Commercial Register, maintaining commercial books) and to the procedures of bankruptcy reorganization (preventive concordat) and bankruptcy.

b- The tenant-manager exploits the business establishment under his name and for his account. This exploitation is not only a right of the tenant-manager, but also an obligation which may be imposed on him to avoid the risk of loss of the establishment’s customers. The tenant-manager must operate the business as a prudent administrator. He cannot change the nature of the business provided for in the contract, nor can he add a new trading activity to the business subject of the leased premises unless such activity is accessory to said business.

Furthermore, the tenant-manager cannot sublease the premises without the written approval of the lessor because of the personal nature of the business management contract with regard to the tenant-manager.

Finally, the tenant-manager must operate the business on the premises where the establishment is located.

c- The tenant-manager may, upon expiration of the contract, engage in a commercial activity similar to that of the previously leased business establishment, provided he does not divert the latter’s customers, unless explicitly provided for in a covenant/an undertaking not to set up a business within a validly stipulated time and place.

d- The tenant-manager must pay the rent on the date set forth in the contract. It may consist of a fixed rent or of an amount proportional to the profits resulting from exploitation of the establishment. The parties may also include an escalator clause in the contract, whereby the rent varies according to a certain criterion: cost of living, value of merchandise sold, etc.

e- The tenant-manager may not sell the components of the business establishment, at the exception of the merchandise he owns in the establishment.

f- The tenant-manager must, upon expiration of the contract, return all real and incorporeal property constituent of the business establishment, including new fixtures which cannot be detached from the establishment without damaging it. The tenant- manager may not avail himself of the increase in the number of customers to claim compensation of any kind. Likewise, the lessor may not, by invoking a decrease in the volume of clientele, hold the tenant- manager responsible, except by proving the latter’s fault.

B- Effects of the contract on third parties.

1- Effects on the lessor’s creditors:

a- In order to safeguard the possessory rights (security interests) of creditors over the lessor’s assets, Decree No. 11 authorized the creditors to ask the court to hold moneys owed to them immediately due and payable if it determines that the contract of business management jeopardizes their recovery. This demand to the Court may be introduced within fifteen days from the publication of the contract.

b- At the expiration of the contract and for fifteen days as of publication of its termination (newspaper and Commercial Register), the tenant-manager remains jointly and severally liable with the lessor for all debts resulting from the exploitation of the business establishment.

The tenant-manager may bring a secondary action against the lessor for recovery of all amounts advanced by him to the lessor.

2- Effects on the tenant-manager’s creditors:

a- The lessor remains jointly and severally liable with the tenant-manager for all debts incurred by the latter as a result of the exploitation of the business establishment, after conclusion of the contract but before fulfillment of the publication’s formalities (newspaper and Commercial Register).

The lessor may bring a secondary action against the tenant-manager for recovery of all amounts advanced by him to the tenant-manager.

b- After all the publication formalities have been met, the debts incurred by the tenant- manager are his sole responsibility.

c- The tenant-manager remains bound by the contracts concluded with third parties and still being in effect at the date of termination of the business management contract, with the exception of employment contracts which are passed by law to the lessor.

3) Finally, Decree No. 11 provides that when, under the appearance of a business management covenant, the contracting parties had concealed, to the detriment of third parties, another transaction such as the sale or the formation of a partnership, they are held jointly liable to interested parties for all debts relating to the exploitation of the establishment; such liability is independent of all other sanctions likely to result, if any, from the enforcement of the rules of Common Law.

V- Termination of the business management contract.

The business management contract terminates like other contracts, namely, at the expiration of its term, by mutual consent of the parties, by unilateral termination if the contract is for an indefinite duration, because of impossibility of performance due to acts of God, cancellation, nullity, etc.

The business management contract is also terminated in the event of death, incapacity, or bankruptcy of the tenant-manager because of the personal nature of the contract with regard to him. In the event of bankruptcy of the lessor, the contract remains in effect, subject to its invalidation if concluded after the discontinuance of payment and before the adjudication of bankruptcy, and provided the tenant-manager knew of said discontinuance of payment.

VI- Tacit renewal of the business management contract.

The tacit renewal of the contract can be provided for in a contractual provision.

In the absence of such a contractual clause, the contract will be implicitly renewed if, without an opposition on the part of the lessor, the tenant-manager has continued to exploit the business establishment after expiration of the term of the contract.

PROTECTION OF INTELLECTUAL PROPERTY RIGHTS

Protection of Intellectual Property Rights is administered in Lebanon by the old Decree No. 2385 of 17 January 1924 amended by the law of 31^st January 1946. This Decree covers the following matters:

- Patentable inventions and Patents;

- Industrial designs and models;

- Trademarks;

- Temporary protection in fairs and exhibitions;

- Unfair competition;

- Literary and artistic property.

At the same time, Lebanon acceded to several international Conventions related to the protection of Intellectual Property namely the Paris Union Convention for the Protection of Industrial Property and the Bern Convention for the Protection of Literary and Artistic works.

The law No. 75 of 3 April 1999 amending the above-mentioned Decree No. 2385 for the Protection of Literary and Artistic Property entered into force in Lebanon on 13June 1999.

I- Registration of commercial and industrial trademarks.

A- Filing of the commercial industrial trademark.

* No one can claim the right to a commercial or industrial trademark unless he had previously registered such trademark with the Office of Protection of the Intellectual Property, a division of the Ministry of Economy and Trade.

* Whoever claims the prior use of a non-registered commercial and industrial trademark must provide evidence of such use in writing.

* When a registered trademark has not been opposed or challenged during a five-year period following its filing, ownership of such trademark may no longer be contested on the group of the priority right of usage of the first applicant, unless it is established that, at the time of filing, the applicant was aware of ownership of the trademark by the first user. In this case, evidence must be shown of free and uninterrupted use prior to filing.

B - Request for filing of the commercial and industrial trademark.

The owner of the trademark or his agent must, under penalty of nullity, file a written application with the Director of the Office of Protection of the Intellectual Property containing the following information:

Un- Last name, first name, nationality and domicile of the applicant;

Deux- Last name, first name, nationality and domicile of his agent, if any;

Trois- Business or industry description of the applicant:

Quatre- Short description of the trademark:

Cinq- A list of products and goods to which the trademark will be applied, with their international classification of product numbers;

Six- Date of prior filings made abroad for the same trademark, if any; and

Sept- The date of the power of attorney. if any.

The following documents should also be attached to the application:

Un- Two samples of the trademark, with, if necessary, specification of color and size;

Deux- The original power of attorney; and

Trois- Typographic reproduction of the trademark (measuring at most 10 cm. of length and 10 cm. of width).

After ascertaining the legality of the application and that of the documents attached to it, and following the receipt of fees payable for registration and publication of the trademark in the Official Gazette, the Director of the Office of Protection will proceed to the filing and registration of the trademark in an ad hoc register.

The Director of the Office will later remit a certificate of registration of the trademark to the applicant or his agent.

C- Duration of validity of registration of the commercial and industrial trademark.

The registration is effective for a period of fifteen years. This period is renewable for unlimited additional fifteen-year terms, on the sole condition of payment of all fees due.

However, the registration may also be made effective for thirty, forty-five, sixty, or even more years. The only condition is payment of all fees due.

D- Renewal of registration of the commercial and industrial trademark.

If the applicant wishes to renew the registration of the trademark, he must provide the Director of the Office of Protection of the Intellectual Property with an application for the initial registration, as well as the supporting documentation required for registration.

He must also pay a fee for renewal. A certificate of renewal will be remitted to the applicant by the Director of the Office after registration of the said renewal in an ad hoc register.

II – Obtaining a patent .

A- Application for a patent.

Any person may apply for a patent. Applications should be addressed to the Office of Protection of the Intellectual Property by the inventor or his agent.

The following documents must be attached to the application :

1- A legalized power of attorney, if the owner is represented by an agent. A foreign owner is required to elect a person domiciled in Lebanon to represent him;

2- A description of the patent applied for in the Arabic language; however, a technical description may be provided in a foreign language: and

3- Drawings and blueprints needed to understand the invention.

The application must specify:

1- The name of the patent;

2- The name of the owner, his age, profession, nationality and domicile;

3- The name of the agent, if any;

4- The object of the invention described in an accurate formula; and 5 - If the inventor has duly obtained or applied for a patent for the same invention in another country, he will be required to make a declaration thereof in the application.

The Director of the Office will draft a report establishing the date and hour of filing of the application and the documents attached to it. He will also proceed to the publication of the invention in the Official Gazette. After that, he will deliver a certificate of invention to the inventor.