Founded in 2005 and published three times a year by law students of the University of Virginia, the Virginia Law & Business Review is one of the nation's premier journals of business legal scholarship.
Deutsche Bank’s creative invention of a Shari‘ah-compliant structure to invest client funds enables it to attract business in the near $2 trillion market. However, its means of achieving compliance has proven to be highly controversial amongst Islamic scholars, raising opposition that it is illegal under Shari‘ah law, not a truly Islamic product, and could threaten the existence of perceived legitimate products.
Achieving compliance has been possible through an original technique for utilizing promises in Islamic finance, with Deutsche Bank claiming: “we have found a Shari’a-compliant method to make an investment pay-off . . . that would not normally be Shari’a-compliant.” The failure to adequately address the issue of promises in current Islamic finance standards not only causes uncertainty as to the legitimacy of Deutsche Bank’s products, but also undermines the entire Islamic financial market by leaving the matter wide open for development and interpretation. The necessity of addressing the divisive issue of promises can create the required certainty to help this industry grow, and requires an assessment of legal doctrines in Islamic jurisprudence to help clarify the issue of promises. In offering a clearer understanding of the enforceability of promises, this article seeks to offer a solution to create certainty in the market.
In his recent article, Professor Richard Squire offers a provocative theory in which he claims the underlying claimants in shareholder litigation against corporate policyholders are overcompensated due to what he describes as “cramdown” settlements, under which insurers are forced to settle due to the “duty to contribute” that arises under multi-layered directors and officers (“D&O”) insurance programs. He also offers a novel idea regarding how this problem could be fixed by what he refers to as “segmented” settlements in which each insurer and the policyholder would be allowed to settle separately and consider only its own interests in doing so.
In this Response to that article, I further explore the assumptions underlying Professor Squire’s claims. I also explore the complexities associated with implementing a segmented settlement scheme because such a scheme is not consistent with the existing policy language or common law that has developed. Under the existing policy language, insurers are only contractually obligated to contribute to settlements that are reasonable based upon the policyholder’s expected liability at trial. Consequently, the policy language regarding settlements would need to be rewritten to allow insurers to consider only their own financial interests when deciding whether to settle. In addition, in order to implement a segmented settlement scheme, the exhaustion requirement that currently exists in many excess policies would need to be removed to allow insurers to settle for less than their full policy limits. Such changes would have a dramatic impact on the structure of insurance programs and the risk transferring function of insurance because excess insurers’ exposure would increase while policyholders may be forced to become self-insured and fund significant portions of settlements. Such changes would also create some practical difficulties regarding the trials of cases in which the policyholder settled but some of the insurers had not because such cases would proceed without a defendant, the policyholder. The Response closes by addressing the issue of whether segmented settlements would be appropriate for other lines of corporate insurance.
Over the years, a vast amount of academic literature has addressed issues surrounding liquidated damages clauses. Some scholars have written about the tests that courts apply to determine the enforceability of these clauses; many other scholars have debated the efficiency of enforcing “penalty” liquidated damages clauses. Surprisingly, however, there has been scant—if any—scholarly discussion about why courts ever enforce liquidated damages clauses at all.
The importance of having a coherent theory of liquidated damages is twofold: First, if there is no such coherent theory, then it seems as though courts should not continue to enforce compensatory liquidated damages clauses. Second, in order to articulate a defense of or attack on “penalty” clauses, we must first be able to articulate what it is we are doing when we enforce compensatory liquidated damages clauses. This Article will bring the reader a fresh perspective on liquidated damages and will examine the unsteady theoretical foundations upon which they stand—an unsteadiness which appears to have gone unnoticed in the literature. This Article will argue that the lack of a justification for the enforcement of liquidated damages clauses is a glaring omission in the body of contract law and contract law scholarship, and, in response to this omission, this Article will provide a foundational theory upon which further debates can stand.
The common understanding of liquidated damages provisions—pervading discourse on the topic—is that they are simply one of many clauses in a contract. In arguing for our freedom to contract about remedial terms, Richard Epstein writes: “Damage rules are no different from any other terms of a contract. They should be understood solely as default provisions subject to variation by contract.” While perhaps remedial provisions are written with respect to a particular eventuality, Epstein sees these clauses as components of the contract.