Lebanon: Franchise & Licensing

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Lebanon.

It will cover pre-offer, registration and other requirements; ongoing relationships; renewals and terminations; and general considerations.

This Q&A is part of the global guide to Franchise & Licensing. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/franchise-and-licensing/

  1. Is there a legal definition of a franchise and, if so, what is it?

    Lebanese law does not provide specific regulations regarding franchising and does not provide a specific definition of franchise agreements. However, the Beirut Court of Appeal defined franchise agreements in its Decision No. 1106/2009 of July 30, 2009, and there has been other important case-law which has clearly identified the characteristics and components of franchise agreements.

    According to the Decision No. 1106/2009 Court of Appeal in Beirut:

    Franchise is the grant of a right to use a trademark in connection with the manufacturing and/or the distribution of products and/or provision of services; together with the transfer of a certain know-how from the franchisor to the franchisee; and the cooperation between the parties.

    Also, the Court of First Instance in Beirut, Decision No. 28/92 dated January 30,/1992 defined a franchise as an agreement between a trader engaged in wholesale trade and a person who wants to use retail trade independently or for his own account. The franchisor then facilitates the formation of a commercial shop that is owned by the franchisee and gives him the right to sell goods of a well-known brand with the right to use this brand and the trade name in his shop, provided that the franchisee refrains from selling other goods competing with this brand.

    Another definition of franchise can be found in the Code of Ethics set by the Lebanese Franchise Association which states:

    “Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the franchisor and its individual franchisees, whereby the franchisor grants its individual franchisees the right, and imposes the obligation to conduct a business in accordance with the franchisor’s concept. The right entitles and compels the individual franchisee, in exchange for a direct or indirect financial consideration, to use the franchisor’s trade name, and/or trade mark and/or service mark know-how*, business and technical methods, procedural system, and other industrial and/or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between the parties to this purpose.”

  2. Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.

    In principle, there are no pre-offer requirements other than having a corporate structure with a fully comprehensive and defined concept to act as the franchisor, in addition to another local corporate structure experienced in the franchisor’s field of work (such experience will be proved through portfolios and feasibility studies of the potential franchisee).

  3. Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.

    Registration with the Commercial Register: A franchise agreement must be registered with the Commercial Register file related to the corporate structure resident in Lebanon. If both the franchisor and the franchisee are corporate structures resident in Lebanon, the franchise agreement must be registered in the Commercial Register of both structures. This registration is for publicity purposes only and does not affect the validity of the agreement. Any updates or amendments to the agreement must also be registered with the Commercial Register.

    Registration with the Ministry of Economy: the trademark used by the franchisor and franchisee must be registered with the Trademark Register at the Ministry of Economy. Article 72 of the resolution no.2385/1924 issued on January 17, 1924, as amended by the law of 31/1/1946 states: “Personal ownership of a trademark shall not be claimed unless such a trademark has been previously filed in the Protection Bureau as per the provisions of Article (79) and subsequent articles thereto.”

    Accordingly, the trademark will not be protected unless registered with the trademark register.

    NB. The legislator did not initiate a special register at the ministry of economy for the registration of franchise agreements similar to the register created for the registration of the commercial representative agreements.

  4. Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to sub-franchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?

    There are no franchise specific disclosure requirements; however, in this regard, the consumer protection law may be applied. According to the consumer protection law, suppliers must provide consumers with exact, sufficient, and clear information about the identification of the structure, the goods or services subject of the offer, the guarantees offered by the supplier, etc.

    The law does not specify when and how the disclosure must be made, or the disclosure format. However, it is a legal requirement for the disclosure normally to be made in the Arabic language. Cases where it is permissible to use French or English as a substitute for Arabic can be determined only by a decision of the Minister of Economy and Trade.

    NB. The above rules apply also to sub-franchisee since they are general rules applied to any supplier. In case of failure to comply, the franchisor will be liable to a fine varying from 40 million LBP to 75 million LBP (26,667 USD to 50,000 USD).

  5. If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?

    If the franchisee intends to use a Special Purpose Vehicle to operate each franchised outlet, the disclosure must be made to each individual SPV franchisee since the SPV acts as an independent legal entity even though it is a subsidiary of the parent company.

  6. What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?

    The mis-selling by the franchisor could result in the termination of the agreement on the franchisor’s responsibility that have breached the agreement. The breach of the agreement entails the contractual liability of the party in breach (ie. The franchisor in this case) and the obligation to compensate the other party (the franchisee) for all loss suffered by such breach.

    As for the disclaimer clause, any clause in the agreement that cancels the protection of the franchisor or franchisee and the specificity of the franchise agreement through emptying the agreement from its basic elements is considered as void. Please note that so far there is no case-law related to this matter.

    As an illustration, Article 11 of the Consumer Protection Law No. 659/2005 may be applied on the case of mis-selling by the franchisor.

    Article 11: A misleading advertisement means an advertisement which by any means
    includes a false representation, declaration or pretense or which contains
    expressions of such a nature as to mislead or deceive the consumer, either directly
    or indirectly.

    A representation, declaration or pretense should be considered misleading where
    treats, inter alia, of one of the following issues:

    • The nature, composition and essential characteristics of the goods as well as the elements or the element's quantity of such goods.
    • The origin, weight, volume, manufacturing method, expiry date, directions for use or safety instructions of the goods.
    • The type of the service and the agreed place for the provision of such service; the safety instructions and the essential characteristics in terms of quality or benefits to be expected from such service.
    • The contract terms, the total price and the method of payment.
    • The advertiser's obligations.
    • The identity, qualifications and description of the manufacturer or supplier.

    The following shall also be considered a misleading advertisement:

    • The false declaration by the advertiser that he holds prizes, certifications, attestations or private or official medals, and the claim of scientific foundations not supported by evidence or facts.
    • The advertisement which include the illegal use of a logo or a trademark, or the use of an imitated or simulated mark.
  7. Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?

    Non-negotiable or adherence agreements are recognized and acceptable by Lebanese law as indicated in Article 172, para. 2 of the Code of Obligations and Contracts which states:

    “When one of the parties simply adheres to a standard draft which is merely submitted to him and whose content he would not be authorized to discuss, as a matter of law or of fact, the contract is said to be formed by adherence (eg. Transport contracts concluded with a railway company; insurance contract…)”

    Accordingly, franchise agreements in Lebanon may be issued on a non-negotiable, “take it or leave it” basis subject to the mandatory clauses in the Lebanese law.

  8. How are trademarks, know-how, trade secrets and copyright protected in your country?

    Trademarks: Trademarks are regulated by Resolution No. 2385/1924.Personal ownership of a trade mark cannot be claimed unless the trademark has been previously registered at the Ministry of Economy. The minimum protection is for a period of 15 years, which can be renewed for subsequent periods of 15 years. Penal sanctions apply to any person that deliberately imitates or uses or affixes the mark to their goods and products or sells a counterfeited mark or a fraudulent imitation of such mark. The right holder can also claim compensation for damages.

    Copyright: Artistic and literary works are protected by Law No. 75/1999. However, ideas, data and abstract scientific facts are excluded from the protection provided by this law.Any person who infringes copyright will be required to pay fair compensation to the copyright holder for the material and moral damages. The infringer may also be liable to penal sanctions.A copyright must be registered at the Ministry of Economy.

  9. Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.

    Franchise agreements are not subject to any statutory controls or regulation in Lebanon, but rather they are subject to the general rules governing commercial relationships in Lebanon including: the Code of Commerce; the Code of Obligations and Contracts; the Income Tax Law; Consumer Protection Law; and Trademark, Industrial Design and Unfair Competition Law. Accordingly, there are no franchise specific laws governing the ongoing relationship between franchisor and franchisee.

  10. Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.

    There is no competition law in Lebanon. A draft law was placed before the Lebanese Parliament in 2009 but it has not yet been approved. This being said, and in the absence of competition law in Lebanon, it is permissible to prohibit online sales or insist on exclusive supply or fix retail prices.

  11. Are in-term and post-term non-compete and non-solicitation clauses enforceable?

    In Lebanon, in-term and post-term non-compete and non-solicitation clauses are enforceable upon the condition that such clauses set a reasonable time limit/frame and territorial/geographical scope. According to the Code of Obligations and Contracts any condition is void if its effect is to restrain or forbid the exercise of rights and liberties of any human being, such as the exercise of civil rights and the right to matrimony. This provision does not apply in case one party should prohibit himself from carrying on a certain profession or industry for a limited time or within a given sector.

  12. Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?

    The Consumer Protection Law No 659/2005 is applicable to franchise agreements in Lebanon due to the similarities between the franchisor and the supplier on one hand and the franchisee and the consumer on the other hand in relation to the rights and obligations of the parties (eg. disclosure requirements, safety of the goods and services, etc.).

  13. Is there an obligation (express or implied) to deal in good faith in franchise relationships?

    In Lebanon, there is an obligation to deal in good faith in any contractual relationship according to Article 221 of the Code of Obligations and Contracts (“Covenants concluded according to regulations are binding on those who are party to it. They must be understood, interpreted and carried out in conformity with good faith, equity and usage.”). This rule also applies to the franchise relationship.

  14. Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?

    In principle, there are no employment or labour law considerations that are relevant to the franchise relationship. The franchisor retains his legal, financial and administrative independence and bears the risks and consequences of his activity.

    The staff of the franchisee are not normally considered to be the franchisor’s employees. The staff of the franchisee could, however, be deemed to be the employees of the franchisor if, inter alia, the employees were undertaking the work under the direction and supervision of the franchisor, and the employee’s remuneration is settled by the franchisor rather than the franchisee.

  15. Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?

    As indicated previously, franchise agreements are not subject to any statutory controls or regulation in Lebanon. Lebanon has however enacted specific regulations regarding commercial representation and exclusive distribution, with the Law No. 34/67, and due to the broad definition given to commercial agencies and the common economic role they share with franchising, franchise agreements were previously considered by Lebanese Courts as commercial agency agreements.

    However, a distinction has been drawn in Lebanese law, in consequence of a decision of the Beirut Court of Appeal on 30 July 2009 (1106/2009), between commercial representation and exclusive distribution agreements on one hand and exclusive franchise agreements on the other hand, the latter falling outside the 1967 Law.

    Decisions of the Court of Appeals are not necessarily binding on other courts, and it is possible that there might be further developments under which a court may take a less benign view of a franchise agreement than did the Beirut Court of Appeal in 2009. Nevertheless, the decision of the Beirut Court of Appeal has stood for ten years and the general view in Lebanon is that it is likely though not certain to be followed in other cases.

    The importance of such distinction is to avoid applying the strict rules of the 1967 law on franchise agreements such as rules related to Lebanese nationality of the commercial representative, damages and compensations paid to the commercial representative for non-renewal of the agreement, exclusive jurisdiction of the Lebanese courts and mandatory application of the 1967 law.

    Accordingly, the features and characteristics of the franchise agreement must be clear when drafting the agreement so that it will not be caught as a commercial representation agreement.

  16. Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?

    Since the franchise agreement is a commercial agreement, the nature and payment of royalties and the interest that can be charged are subject to the parties’ agreement. Moreover, no material exchange control matters arise under Lebanese law in relation to the royalties

  17. Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?

    In principle, it is possible to impose contractual penalties on franchisees for breaches of restrictive covenants. However, since restrictive covenants are considered as an exception to the common rule of freedom of work and commerce and free fair competition, Lebanese judges tend to apply a very restrictive interpretation to such covenants for the benefit of the party that is restricting its freedom. For example, even in cases where the non-competition covenants comply with conditions of Article 83 of the Code of Obligations and Contracts (as to the specificity of the industry sector and the timeframe or the geographical location), judges may invalidate such provision on the ground of public policy.

    Therefore, for such a clause to be enforceable, it must be fair (i.e. the penalties imposed shall not exceed the damages occurred due to such breach) and limited to a timeframe and geographical area in compliance with article 83 of the Code of Obligations and Contracts.

  18. What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?

    The franchisor and franchisee are subject to the following taxes:

    Franchisor:

    • If the franchisor is a Lebanese resident company/entity, the franchise royalties will be subject to business income tax at a rate varying from 4% to 21% if the company is subject to the deemed profit method, and at a rate of 17% if the company is subject to the real profit method.
    • If the franchisor is a non- resident company/entity, the franchise royalties will be subject to withholding tax at a rate of 7.5% unless there is a double-taxation treaty with the country of the residency of the franchisor, in which case the rate will be either reduced, increased or exempted from the tax.

    Franchisee:

    • The income earned by the franchisee will be subject to business income tax at a rate varying from 4% to 21% if the company is subject to the deemed profit method and at a rate of 17% if the company is subject to real profit method.
    • If the franchise was for a restaurant/hotel the income earned will be subject to an addition tax at a 5% rate (indirect tax).
    • Value added tax at a rate of 11% if the franchisee’s income for 4 consecutive quarters exceeds 100,000,000 LBP equivalent to 66,667 USD

    NB. In addition to the above taxes, a stamp duty tax is imposed on the franchise agreement at a rate of 0.04%.

  19. Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?

    Prior to the issuance of the decision No. 1106/2009 by the Court of Appeal, it was considered that Article 4 of Law No. 34/67 applied to this case. Article 4 of Law No. 34/67 states:

    The commercial representation contract must be considered as having been concluded in the joint interest of the contracting parties.

    Thus, breach of the contract by the principal without he agent’s fault or other valid cause, entitles the latter, notwithstanding any agreement to the contrary, to claim for compensation equivalent to the damage sustained and to the unrealised profit.

    Likewise, the commercial representative is entitled, even when the contract has come to expiry, and notwithstanding any agreement to the contrary, to claim for compensation which the court shall assess, if his activity has promoted with manifest success the launching of the trade mark represented or has increased the number of its customers, while he is not enabled to reap the fruit of this success because of his Principal’s refusal to renew the representation contract.”

    However, in view of the Court of Appeal’s decision, the franchise agreement is no longer subject to the above article unless and until the above-mentioned decision is successfully challenged.

  20. Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?

    Mandatory termination rights can be as per the below:

    • If the exclusivity clause is not specified in time and place
    • If the agreement lacks substantial elements
    • If the agreement is contrary to public order
    • Impossibility of implementation of contractual obligations
  21. Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.

    I refer to the answer to question 19 above. As indicated, the commercial representative is entitled to compensation even when the contract has expired, if his activity has promoted with manifest success the launching of the trademark represented, or has increased the number of its customers, while he is not enabled to reap the fruit of this success because of his principal’s refusal to renew the representation contract. Accordingly, the commercial representative may claim ownership of intangible assets (local goodwill) in case of expiry or termination of the agreement.

    However, in the case of franchise agreement, the franchisor benefits from the attractiveness of the network — and consequently of the goodwill gained from the common efforts of franchisor and franchisee — throughout the term of the agreement to operate its business and to derive profits therefrom. Thus, the contribution to and/or development of the client base for the benefit of the franchisor finds its “counterpart in the economic advantages that benefited the franchisee during the term of the agreement. Therefore, the franchisor may not claim ownership of intangible assets after the expiry or termination of the agreement.

  22. Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?

    The Lebanese Franchise Association (LFA), a private organization, was established in 2006 in response to the needs of a fast-growing franchise industry, with the mission to develop franchising in Lebanon, and to promote Lebanese franchises worldwide.

    Joining the Lebanese Franchise Association is not mandatory; however, it is commercially advisable as it helps in promoting the Lebanese franchise through organizing international exhibitions.

    Joining the Lebanese Franchise Association involves signing and adhering to its code of ethics.

  23. Are foreign franchisors treated differently to domestic franchisors?

    Foreign and local franchisors have different obligations towards the tax authority and the commercial register. In this regard, please see the answers to questions 3 and 18 above.

  24. Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?

    The principle is found in Article 301 of the Code of Obligations and Contracts which states: “When the debt is a sum of money it must be settled in the currency of the country. In normal times and when the official rate has not been assessed for fiduciary money, the parties are free to stipulate that payments shall be effected in specified coins or in a foreign currency.”

    According to the above article, payments in connection with the franchise agreement may be made in the local currency or in a foreign currency.

  25. Must the franchise agreement be governed by local law?

    Since the franchise agreement is a commercial agreement, the parties have the freedom to choose the law governing their agreement whether the local law or a foreign law.

    However, it is important to note here that if the franchise agreement was deemed to be a commercial representation agreement, i.e. if the case-law of the year 2009 referred to in the answer to question 19 above was successfully challenged, then the application of Law No. 34/67 would be mandatory.

  26. What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?

    As indicated in the answer to question 25 above, the franchise agreement is a commercial agreement and thus the parties may refer their disputes to local courts, foreign courts or to alternative dispute resolution methods (including arbitration).

    NB. In case the franchise agreement was deemed to be a commercial representation agreement, , i.e. if the case-law of the year 2009 referred to in the answer to question 19 above was successfully challenged, then the dispute can only be resolved by the local courts according to Article 5 of Law No. 34/67 which states: “Notwithstanding any agreement to the contrary, the Courts of the place where the commercial representative exercises his activity are competent to adjudicate disputes arising from the contract of commercial representation”.

  27. Does local law allow class actions by multiple franchisees?

    Lebanese law does not recognize class actions. However, if one or more named franchisees have filed a lawsuit against the franchisor which raises an issue common to all franchisees, the plaintiffs (i.e..the franchisees) have the right to request the intervention of those franchisees who have a common interests in the filed lawsuit, according to the Code of Civil Procedure.

  28. Must the franchise agreement and disclosure documents be in the local language?

    According to Article 19 of the Consumer Protection Law No. 659/2005, the agreement must be drawn in simple and straightforward terms and in the Arabic language; however, the agreement may be drafted in a foreign language where parties so agree.

    It is important to note here that if the agreement was drafted in a foreign language it must be translated by a sworn translator for registration purposes since the Lebanese authorities only accept Arabic documents.

  29. Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?

    Article 4 of Law No. 81 dated October 10, 2018 related to Electronic Transactions and Personal Data states that the electronic writings and signatures shall have the same legal effect as the writings and signatures made on paper or any other medium, provided that the person producing them is identifiable and that they are organized and stored in a way that preserves their safety. Any electronic writing that does not meet the criteria above shall be considered as introduction of written evidence”.

    Articles 9 and 17 of the same law state that the electronic signature should be issued through the use of a safe medium that identifies the signatory and provides a guarantee that the signature corresponds to the legal process in question. The signature must be linked to the protection measures authenticated by the authorized authentication service provider; thus, it is presumed to be reliable and to have satisfied the requirements unless proven otherwise.

  30. Can franchise agreements be stored electronically and the paper version be destroyed?

    For the registration of the franchise agreement, the Ministry of Economy and the Commercial Register will request an original hard copy signed by the parties. Accordingly, the paper copy may not be destroyed.

  31. Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.

    The most recent amendment to Lebanese law was the amendment made to the Lebanese Code of Commerce through Law No. 126 of March 29,2019. This law has amended the Lebanese Code of Commerce to meet local and international standards and evolutions. These amendments introduce new legal concepts resulting from the development of business in Lebanon. This law did not introduce any rules related to franchise; however, being a commercial agreement it will have some impact on franchise agreements.