The Beirut Supreme Court has ruled that arbitration clauses in exclusive distribution agreements signed with Lebanese representatives are invalid. Thus, only Lebanese courts have jurisdiction to settle disputes between the parties to such agreements.
On 1 January 1996 Korean company LG Electronics Inc entered into an exclusive distribution agreement with Lebanese company Brothers Electronics Sarl (BE), pursuant to which BE was appointed as the exclusive distributor for LG products in Lebanon.
The exclusive distribution agreement signed between the parties contained an arbitration clause stating that any disputes arising between the parties must be settled under Korean law by arbitration before the Korean Commercial Arbitration Board (KCAB).
In 2009 LG terminated the exclusive distribution agreement and submitted a claim against BE before the KCAB, claiming compensation for BE's alleged breaches of its contractual obligations.
On 6 August 2010 the KCAB rendered an arbitral award ordering BE to pay compensation.
On 2 March 2011 the Beirut First-Instance Court president recognised the enforceability of the arbitration clauses in exclusive distribution agreements and granted the exequatur of the arbitral award in question.
BE filed an appeal of this decision, stating that:
- Decree-Law 34/67 – which relates to exclusive distribution agreements in Lebanon – clearly states that only Lebanese courts have jurisdiction to settle a dispute between such parties; and
- because this decree-law is of public order, arbitration clauses are unenforceable.
Appeal court decision
The appeal court considered Decree-Law 34/67, especially Article 5, which states 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.
The appeal court resolved that the first-instance decision granting the exequatur of the arbitral award violated Article 5 of Decree-Law 34/67. Therefore, the appeal court ruled that the Lebanese courts have exclusive jurisdiction to hear disputes arising from a commercial representation agreement executed in Lebanon and that stating otherwise is contrary to public order.
Beirut Supreme Court decision
LG filed an appeal before the Beirut Supreme Court, arguing that the appeal decision did not consider many legal points because:
- it failed to differentiate:
- between internal public order and international public order, which should not be violated; and
- that international public order does not prohibit arbitration in commercial representation;
- Article 5 of Decree-Law 34/67 does not explicitly exclude arbitration; and
- by signing the exclusive distribution agreement, BE had granted the KCAB jurisdiction to settle any dispute arising from the agreement. Therefore, BE could not deny such competence pursuant to the estoppel principle.
While confirming the appeal court decision, the Beirut Supreme Court ruled that:
- the appeal court had correctly applied Article 817 of the Code of Civil Procedure, which clearly sets out when a foreign arbitration award conflicts with international public order;
- international public order protects (among other things) the fundamental principles established by national law and therefore cannot be invoked or interpreted in a manner which contradicts such principles that are of national public order;
- the exclusive jurisdiction granted to the Lebanese courts by Article 5 of Decree-Law 34/67 is of public order and parties cannot agree otherwise; and
- when a foreign arbitration award conflicts with a national fundamental principle, such arbitration award should not be granted exequatur and cannot be heard in Lebanon.
As regards the present case, the Beirut Supreme Court considered that Article 5 of Decree-Law 34/67 is of public order and aims to protect Lebanese representatives. As international public order cannot contradict this fundamental policy, the KCAB cannot be granted exequatur and the case should be heard in Lebanon.
By adopting this approach, the Beirut Supreme Court has enforced the traditional position which grants Lebanese exclusive distributors a high level of protection. The Beirut Supreme Court considered that Article 5 of Decree-Law 34/67 (which grants exclusive jurisdiction to the Lebanese courts to settle any disputes arising from commercial representation agreements) covers arbitration clauses regardless of what the parties have agreed. Thus, any clause in a commercial representation agreement to the contrary is considered void and invalid on the ground that it conflicts with national public policy.
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