Dr Williams suggested that sharia could play a role in "aspects of marital law, the regulation of financial transactions and authorised structures of mediation and conflict resolution".
Lord Phillips said: "It was not very radical to advocate embracing sharia law in the context of family disputes, for example, and our system already goes a long way towards accommodating the archbishop's suggestion.
"It is possible in this country for those who are entering into a contractual agreement to agree that the agreement shall be governed by a law other than English law."
Inayat Bunglawala from the Muslim Council of Britain told BBC News that sharia law applied only to civil matters.
He said: "I think it's important to clarify that English common law already allows us to go to mediation to whichever third party we wish. "So that is why you have sharia council, that is why you have Jewish courts. It is a truly voluntary arrangement.
"There is no parallel legal system. This system cannot override English common law system at all."
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