Saudi Law! In Texas Federal Courts!

Douglas v. Smith Int’l (5th Cir. July 11, 2012) is a good illustration of a point I’ve made before — the use of foreign law in American courts, including the foreign law of Islamic countries that have legal systems largely based on Islamic law, is commonplace and usually fine. Usually fine doesn’t mean always fine, but it does mean that this is a baby we shouldn’t be trying to throw out with the bathwater, as Texas’s neighbors to the north tried to do. (Oklahoma voters, by constitutional amendment, barred all use of foreign law in Oklahoma state courts, though that amendment was struck down by federal courts on Establishment Clause grounds because it also specifically singled out Sharia law.)

Here’s a brief summary of part of the issue:

On December 30, 1997, Smith employed Douglas, a Missouri citizen, to work on a rotational basis in Saudi Arabia. During the thirteen years until his 2010 retirement, Douglas worked in various positions and in different locations in Saudi Arabia….

On March 1, 2008, Douglas began working for Smith as a district manager in Saudi Arabia. Under the Agreement that governed this final term of employment, Douglas worked on a three month rotation, in which he would work for two months in the field, followed by one month off. Article 84 of the Saudi Labor Law requires employers to pay an end-of-service severance entailing a “half-month wage for each of the first five years and a one-month wage for each of the following years” of employment. LABOR AND WORKMEN LAW, Ministry of Labour, art. 84 (Saudi Arabia). Douglas retired on December 31, 2010, and, pursuant to Article 84, requested severance pay in the amount of $144,657.45. Smith rejected Douglas’s request, reasoning that it was not required to pay the end-of-service award because, inter alia, it had already provided Douglas benefits that exceeded what he was entitled to under Article 84….

The parties agree that the Saudi Labor Law applies to Douglas’s employment in Saudi Arabia. The parties also agree that they may not contract out of Saudi law as any condition in their Agreement “that contradicts the [Saudi Labor Law] shall be deemed null and void.” LABOR AND WORKMEN LAW, art. 8. To that end, Article 8 allows parties to contract for a “release or settlement of the worker’s rights arising from” the Saudi Labor Law, but only to the extent the Agreement is “more beneficial to the worker.” The key provision that Douglas alleges entitles him to benefits under Saudi Labor Law is Article 84:

Upon the end of the work relation, the employer shall pay the worker an end-of-service award of a half-month wage for each of the first five years and a one-month wage for each of the following years. The end-of-service award shall be calculated on the basis of the last wage and the worker shall be entitled to an end-of-service award for the portions of the year in proportion to the time spent on the job.

Smith acknowledges this provision but argues on appeal that Douglas agreed to a “more beneficial” benefits package in the form of 401k and profit-sharing contributions, and thus is not entitled to an end-of-service award. There is no dispute that Smith paid Douglas $190,344.29 in benefits during Douglas’s tenure in Saudi Arabia — an amount greater than what Douglas is eligible to receive under Article 84’s end-of-service award. Douglas argues, however, that the Agreement does not call for such a compromise.

The court proceeds to analyze these claims, and treats them as commonplace matters of the sorts that courts quite rightly adjudicate, without any concern about the fact that they’re using foreign law, including foreign law of a country that has a legal system based on Sharia.

This also helps illustrate why these cases end up in American courts. Douglas is an American from Missouri. Smith International is an American company. Douglas certainly doesn’t want to try to hire a Saudi lawyer to sue over $144,000 in Saudi courts. I expect that Smith International might also prefer to litigate the matter in American courts rather than Saudi courts, and might trust American courts more than Saudi courts.

Why did Smith International agree that Saudi law applies? Partly because that’s likely the legal rule under Texas law, but partly because Smith International is doing business in Saudi Arabia, and wants to be seen by the Saudi authorities as complying with Saudi law with regard to things that it does in Saudi Arabia. Why do American courts apply foreign law in such situations? Because when a transaction takes place in a foreign country, the foreign country has a legitimate interest in having its transaction be judged by that country’s law; international business flows more smoothly when courts respect such sovereign interests. And international business between Texas companies and Saudi businesses and government entities is likely lucrative indeed, as well as easily shiftable to other states’ and countries’ companies if tensions arise.

Moreover, the parties often expect transactions in a country to be governed by the law of that country. That’s especially so when the parties are from different countries, but it makes sense to have the same rule even when the parties are from the same country. One can imagine a rule under which an American suing an American company with regard to employment in Saudi Arabia would be judged by American law, while an Englishman suing an American company with regard to the same employment would be judged by Saudi law. But there would be costs to such a rule, and our courts have generally not adopted such a rule (though in some situations they have).

What if Saudi law called for chopping off an employee’s hand in some situations — would American courts enforce that? Uh, no. What if Saudi law called for imprisoning people who blaspheme against Mohammed — would American courts imprison the blasphemer, or extradite him to Saudi Arabia for imprisonment. No. But so what?

The court here wasn’t called on to enforce the entire body of Saudi law, including those parts that our legal system finds repugnant. It was called on to enforce a particular employment law rule that creates an entitlement to a particular form of payment. There’s nothing wrong, and a lot that’s quite sensible, about American courts applying foreign law — and, yes, even Saudi law — to disputes such as this one.