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Keywords

Establishment Clause; Contracts; Investment Banking; Sharia Law; Sukuk

Abstract

The Islamic finance industry continues to grow quickly as the appetite for everything, from Sharia-compliant home mortgages and car loans to sophisticated financial products, increases. This growth has triggered an interest in sukuk, bond-like financial instruments. And while the international market for sukuk has long been dominated by foreign issuers and English law, the attraction of a niche market compatible with U.S. federal and international securities laws may propel increased participation by U.S. issuers and investors who wish to transact under U.S. federal and state laws. As with all Islamic financial products, sukuk transactions inherently pose a Sharia compliance risk. Thus far, religious compliance has not posed a significant barrier to the international market given that most sukuk transactions are governed by secular laws that incorporate Sharia law or laws that are not averse to interpreting religious law. U.S. jurisprudence, however, has strongly avoided religious questions that would require courts to interpret religious doctrines. While the application of the religious question doctrine helps maintain the separation of church and state, it can withhold secular judicial remedies from parties to a commercial agreement that incorporates religious tenets, such as a sukuk transaction. Drawing upon the example of Dana Gas PJSC, a company that sued to have its own sukuk certificates declared invalid and related payment obligations declared unenforceable due to the transaction’s alleged noncompliance with Sharia law, this Note explores the Establishment Clause obstacles to adjudication of a similar claim under New York law. Ultimately, this Note concludes that the Establishment Clause bars adjudication of the merits of such a dispute and proposes the adoption of legislation, at the state and federal level, that would permit secular courts to “certify” religious questions to party-selected religious tribunals. Pending passage of such litigation, commercial parties are encouraged to utilize alternative dispute resolution.

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