LEBANON: An Introduction to Dispute Resolution

Lebanon: Dispute Resolution 

1) Background to the situation in crisis-hit Lebanon

The challenging situation in crisis-hit Lebanon has been reported worldwide. Since the end of 2019, it has only been compounded by spiralling inflation, one of the biggest non-nuclear blasts in history (the Beirut Port explosion of August 2020), and intermittent COVID-19 lockdown measures.

The economic meltdown came all the more as a shock - to the country and investors alike - since Lebanon is well known for its liberal economy, freedom of exchange and low tax rates. In October 2019, in response to the ongoing economic crisis and particularly the Lebanese currency devaluation, local banks started imposing strict restrictions on cash withdrawals, international money transfers and foreign currency transactions. These de facto capital controls have been implemented without an explicit legislative framework in support of such measures. These restrictions mainly apply to funds in accounts (denominated in LBP or USD) which existed prior to November 2019. Up until the time of writing, the Lebanese parliament has not enacted a law on capital controls.

The impact that these restrictions have on businesses may give rise to arbitration claims which are subject to Lebanese law or seated in Beirut. In this light, this article provides a snapshot of the legislative framework for arbitration, investments and recent developments in Lebanon.

2) Overview of the arbitration legal framework in Lebanon

Investors and business actors in Lebanon increasingly include arbitration clauses in their agreements to benefit from the ability to choose their arbitrators, the speed and flexibility that is offered by arbitration, and the confidential nature of arbitral proceedings.

The provisions of the Lebanese Arbitration Law are based on the old French arbitration law (Decrees No. 80-354 of 14 May 1980 and No. 81-500 of 12 May 1981).

The Lebanese Code of Civil Procedure (LCCP) enacted by Decree Law 90/83, with amendments resulting from Law No. 440 dated 29 July 2002, devotes its second chapter to arbitration. The LCCP makes a distinction between domestic arbitration and international arbitration, the latter being governed by more liberal rules. The main differences between domestic and international arbitration concern the criteria for the validity of arbitration clauses, which are subject to stricter formal requirements in domestic arbitration. Other differences include the availability of recourses to challenging or setting aside an award, which is broader in domestic arbitration than in international arbitration.

Pursuant to article 809 of the LCCP, an arbitration is deemed international "when it involves the interests of international trade." These interests are defined as involving movements of goods or funds beyond borders. In other words, if the operation that is the subject matter of the dispute is linked to more than one country, the arbitration is international. Factors that are not determinative when assessing whether an arbitration is international include the nationality of the parties or arbitrators, the place of the arbitration, the residence of the parties or the place where the contract was concluded. Furthermore, the application of a foreign law or procedure will have no effect on the definition of an arbitration as international.

Regarding international arbitrations seated in Lebanon, article 812 of the LCCP provides that where an international arbitration is governed by Lebanese law, unless agreed otherwise, provisions relating to domestic arbitration apply.

Lebanon is a signatory to the New York Convention with a reservation that the government of Lebanon will apply the convention, on the basis of reciprocity, to the recognition and enforcement of awards made only in the territory of another contracting state. Lebanon also ratified the Washington Convention on 26 March 2003.

3) Lebanese investment framework 

Lebanon has been the subject of few investor-state investment disputes to date. As the country is currently facing an unprecedented economic and financial crisis, however, this will likely lead to a significant increase in investment-related disputes.

Private actors investing in Lebanon benefit from the protection of a number of international investment agreements and from other treaties with investment provisions, which provide for recourse to arbitration in case of dispute. These include 52 bilateral investment treaties (BITs) signed by Lebanon, 43 of which are in force.

In addition to being a signatory to the 1965 ICSID Convention and the 1958 New York Convention, Lebanon has also signed various significant treaties, and ratified various regional and multilateral agreements (e.g. intergovernmental agreements, guidelines and principles).

Further, Lebanon is a party to the convention establishing the Multilateral Investment Guarantee Agency (MIGA). Under the treaty, Lebanese investors may acquire political risk insurance from MIGA in respect of investments made in certain developing states. However, this does not apply to all investments, as certain thresholds must be met (e.g. investments must be medium to long term in nature).

In this context, Lebanon has a generally pro-investment arbitration position. In addition to the Lebanese courts being generally supportive and respectful of arbitration proceedings, all the Lebanese BITs contain arbitration clauses, and the Lebanese Government is open to arbitration in general as governmental entities tend to include arbitration clauses in the contracts they sign with investors.

4) Recent developments 

The COVID-19 outbreak only further aggravated Lebanon's ongoing economic crisis. Disputes surrounding the issue of local banks exercising de facto capital controls have been increasingly on the rise. In effect, Lebanese courts have recently witnessed a marked surge in disputes between depositors and local banks, predominantly relating to unlawful restrictions being placed on cash withdrawals, money transfers and foreign currency transactions.

On a positive note, an increasing number of decisions are being rendered in favour of depositors, upholding the rule of law and sanctioning arbitrary capital controls imposed by local banks in the absence of a law on capital controls. Most recently, the Beirut Judge of Summary Proceedings issued decision No. 25/2022 dated 28/1/2022 ordering the bank to make an international transfer for its client, subject to a coercive fine for each day of delay. Amongst other things, the judge found that (i) the bank is required to effect international transfers as part of banking customs and practice, (ii) the circumstances prevailing in the country could not be deemed as acts of force majeure exempting the bank from its contractual obligations, and (iii) whilst the cheque is a means of payment, it does not discharge the debtor unless it is convertible to cash. Most of the banks have been filing for the stay of enforcement of the court decisions. However, the Court of Cassation recently issued several decisions dismissing the banks’ requests of stay of enforcement.

As mentioned above, in the midst of the difficult situation, Lebanon also experienced one of the biggest non-nuclear blasts in history. On 4 August 2020, an explosion in Beirut Port tore across the capital city, killing over 200 people, injuring over 6,000 and leaving an estimated 300,000 homeless. Naturally, important considerations of liability and compensation for losses sustained were raised in the aftermath of the blast. Pending the release of the official report that specifies the cause of the blast and assigns responsibilities, insurers, reinsurers and victims alike face an uncertain situation.

5) Comment 

Given the tumultuous situation in Lebanon over the last few years, many future claims are expected to be raised against the country. For those considering the dispute resolution mechanism, the legislative framework in Lebanon is appealing to investors and business actors.