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Islamic Law Applied In US Courts

by | 17th, February 2008

PROFESSOR Fadel wrote for States of Islam last year. The case was in a NJ federal courts where two corporations had agreed to use Saudi-Sharia law to decide disputes.

An excellent example of the continued relevance of legal orientalism among at least some American judges is the case of National Group for Communications and Computers Ltd. v. Lucent Technologies International Inc., 331 F.Supp.2d 290. In this case, the judge concluded that the contractual doctrine in Islamic law that renders contracts with gharar – uncertainty or risk – unenforceable, precluded the plaintiff from recovering the going concern value of an enterprise that was forced to liquidate as a result of the defendant’s breach of contract. Accordingly, the court concluded that the plaintiff could recover only the book value of the liquidated firm’s assets.

I do not want to underestimate the difficulty an American judge may have in construing a doctrine such as gharar in a contemporary commercial setting. To my knowledge, there are no modern authoritative treatises of Islamic law as there was in the pre-modern era, and for that reason, any application of Islamic law to a current dispute inevitably requires a judge to engage in a certain amount of hypothetical reasoning, always a difficult task in even the best circumstances. I am critical, however, of the judge’s premises regarding the radical otherness of Islamic legal principles, assumptions that obviously colored the judge’s determination of to apply the doctrine of gharar to the dispute. As a colleague of mine who brought this case to my attention pointed out astutely, the judge, having concluded that Islamic law is “fundamentally different from that of the United States,” id. at 294, obviously decided that the “right” result in this case must be the “wrong” result in the US, as though Islamic law and US law exist in alternate universes, with Islamic law representing all the alternatives rejected by US law.

Of course, the doctrine of gharar while it may be legitimately criticized as being overly formalistic and therefore obsolete in the modern context (at least in many cases), is not radically “other” at all. In fact, the common law of contracts shares with classical Islamic law the refusal to enforce contracts when there is uncertainty as to material terms of the contract, especially price. The problem in this case was that there was no uncertainty in price: a third party had purchased 25% of the liquidated firm’s equity prior to the breach, thereby giving a precise, bargained for price term for the firm.

The court rejected this method for calculating the plaintiff’s damages by giving the doctrine of gharar unprecedented scope: according to the court’s reasoning, any bargain involving consideration whose value is speculative is unenforceable in Islamic law, even in circumstances where the parties themselves have settled on a fixed price. Thus, the court accepted that a contract for the purchase of shares in a corporation could not be enforced in Saudi Arabia, even when the contract fixes the purchase price. According to the classical Islamic law of contracts, however, so long as the consideration is fixed and known, there is no gharar, although there may be disappointment if the deal sours. For that reason, there is no objection to the sale of a plantation, even though the law prohibited an owner of a fruit tree from selling the fruit of her tree prior to the time it had become edible. If, on the other hand, the parties wish to enter into a contract with a contingent pay-off structure, e.g. the sale of a company for a price to be determined in whole or in part by the firm’s future earnings post-sale, as in the case of a partial earn-out, for example, then the doctrine of gharar would be relevant, but even in this case, it would not be dispositive. Because gharar was considered to be relative, only contracts with material uncertainty were unenforceable on that score. In any case, the doctrine has absolutely nothing to do with the fact that only God knows the future, as contracts for future delivery of goods – so long as the price, quality and delivery conditions are clear – are absolutely enforceable, even though there is uncertainty as to the ability of the obligor to perform her obligation in the future. Accordingly, the only uncertainty that Islamic law concerns itself with is uncertainty in the terms of the contract, not the actual value of the consideration.

The court, however, is not disturbed in the least by the apparently absurd result it attributes to Islamic law: after all, Islamic law is different. Moreover, the parties to this suit were “sophisticated business enterprises well-versed in the . . . doctrines of Islamic law. They chose not to include any prophylactic choice of law clause in this case. The parties, therefore, are subject to the full application of Shari’a, however uncompromising that application may be.” Id. at 296. In effect, the court seems to be saying to the plaintiffs that you deserve this result for not opting out of that insane alternative legal universe called Islamic law.

There are at least two other cases that Volokh has picked up where US courts permitted application of Islamic Law. Via



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