Key Takeaways

  • A governing law clause identifies which state’s or country’s laws will control interpretation and enforcement of a contract.
  • Courts usually honor the chosen law, but limitations apply where public policy or mandatory statutes override.
  • Governing law is separate from venue or jurisdiction, though they often work together in dispute resolution.
  • Drafting must be precise—broad language may unintentionally cover torts or statutory claims, while narrow wording may limit enforcement.
  • International contracts raise additional challenges, as some jurisdictions may not recognize or enforce the chosen governing law clause.
  • Businesses often select states like Delaware or New York for predictability and well-developed commercial laws.

What is Governing Law?

The governing law clause, sometimes called choice of law clause, determines what state laws will be used to interpret the contract and which jurisdiction will oversee the enforcement of its terms.

Governing law can be important because a dispute may hinge on differences in local laws. However, the parties in a contract are not necessarily bound to where they live or where the contract is signed. A governing law provision allows the parties to agree to use a particular state's laws to interpret the agreement. Delaware has laws that benefit corporations, for example, so many large corporations interpret their agreements based on Delaware state law.

Courts generally respect the selection by the parties.

Though it can be an important part of a contract, the choice of law provision is usually brief. For example: “This Agreement shall be governed by the laws of the Commonwealth of Massachusetts.”

To avoid surprises, parties agreeing to a contract become familiar with the laws of the state that will be used to interpret the contract or hire local counsel to assist in drafting it.

Why Governing Law Clauses Matter

The governing law clause provides predictability and reduces litigation risk by clarifying which body of law applies to the contract. Without such a clause, courts may apply complex choice-of-law tests that consider factors like where the contract was negotiated, where performance occurred, or where the parties are located. This uncertainty can lead to higher legal costs and inconsistent outcomes.

A well-drafted clause also discourages forum shopping, where one party seeks a jurisdiction more favorable to their claim. By locking in the applicable law, both sides know in advance which rules will govern their rights and obligations.

Governing Law Provisions in Contracts

The governing law clause regulates the local law that will govern the interpretation of the contract the parties agreed to.

As a result, the parties often select a lawyer to draw up the contract who is from or familiar with the state or local law that the parties choose.

Contract law varies between states, and the differences can be important.

Choosing which state's laws by which interpret a contract doesn't mean that a dispute has to be settled there. The parties can often also select a jurisdiction. You could have a governing law clause that chooses to use California law but requests disputes to be decided by a court in New York.

Jurisdiction selection can be crucial. If there's a dispute, it will have to be resolved in the state of jurisdiction. This is often a strategic decision, but sometimes, attorneys take a more practical approach. If you're on the East Coast and the court is in California, that can be an expensive and inconvenient contract dispute to settle.

Drafting Considerations for Governing Law Clauses

When drafting, precision matters. Clauses may be:

  • Broadly worded (e.g., “This agreement and any disputes arising out of it shall be governed by the laws of New York”). This could encompass not only contract disputes but also related tort or statutory claims.
  • Narrowly worded (e.g., “This agreement shall be governed by the laws of California”). This may restrict application to contract interpretation only.

Courts differ on how they interpret such distinctions. Some apply the chosen law only to contract claims, while others extend it to related disputes. Parties should decide whether they want the clause to cover all disputes “arising out of or relating to” the agreement.

Another consideration is neutral jurisdictions. Businesses sometimes select a neutral state to avoid giving perceived “home-court advantage” to one party. Popular choices include Delaware for corporate contracts and New York for finance and commercial agreements because of their sophisticated court systems and established case law.

Exceptions to Governing Law Clause

Some laws cannot be modified by contract and are enforceable despite the governing law clause. For example:

  • Insurance contracts - Some states require that their consumer protection laws relating to insurance are applied in their states.
  • Connection required - Courts also may want to make sure there is a connection between the state chosen for the governing law clause and the parties or type of transaction, such as the contract being signed in the state or one of the parties operating a business in the state.
  • Corporate contracts - Contracts governing corporate behavior usually must be decided by the law of the state of incorporation. However, differences in state law are not great enough to make it a major negotiating issue for most parties.
  • Portions of contracts - Some laws cannot be modified by contract and are enforceable despite the choice of law clause. However, the governing law clause can make certain the parts of contract law that can be assigned in the contract are assigned to the preferred state and jurisdiction.

Limits on Enforceability

Even with a governing law clause, courts may override the parties’ choice in certain circumstances:

  • Fundamental policy conflicts: If applying the chosen law would violate strong public policy in the forum state, courts may reject it.
  • Consumer and employment protections: Many states prevent parties from waiving local protective statutes. For example, California may not enforce clauses that attempt to strip employees of rights guaranteed by its labor code.
  • Lack of substantial relationship: Courts sometimes require that the chosen jurisdiction have a reasonable connection to the parties or transaction. A purely arbitrary choice may be struck down.
  • International contracts: Foreign courts may disregard U.S.-style governing law clauses if local laws mandate otherwise. Parties engaged in cross-border deals should ensure compatibility with international conventions or treaties.

Choice of Venue

The parties in a contract also may choose a venue where legal proceedings would be held, if necessary. It also determines the site of mediation or arbitration proceedings.

A court case's venue is the location and court where the matter will be heard. Having a local venue can be to your advantage in a dispute as well as give your lawyer, who is familiar with local laws and courts, a type of home-field advantage.

For these reasons, venue clauses can be hotly contested. Some contracts contain a “dual” venue clause that allows for more than one location at the plaintiff's option.

To sum up, the governing law can be important. State laws are not the same, and one may be more favorable for your agreement. Choice of venue matters because it may be more expensive and time-consuming to go to a court across the country.

Contracts should contain governing law clauses to clear away confusion on where disputes must be filed and what law will govern.

Governing Law vs. Jurisdiction vs. Venue

Though related, these clauses serve different functions:

  • Governing law: Determines the substantive rules applied to interpret and enforce the contract.
  • Jurisdiction clause: Establishes which court has authority to hear disputes.
  • Venue clause: Identifies the geographic location where disputes will be litigated.

For example, a contract might state that it is governed by Delaware law, but disputes must be resolved in federal court in New York. Careful drafting ensures these provisions work together without contradiction.

Frequently Asked Questions

  1. Is a governing law clause always enforceable?
    Not always. Courts may refuse to enforce it if it conflicts with public policy, lacks a connection to the parties, or attempts to waive mandatory protections.
  2. Can governing law and jurisdiction be in different states?
    Yes. Parties can select one state’s law to govern the contract while designating another state’s courts as the forum for disputes.
  3. Why do many companies choose Delaware or New York law?
    Delaware and New York are favored for their predictable legal systems, business-friendly statutes, and well-developed case law.
  4. What happens if there’s no governing law clause?
    Courts apply complex conflict-of-law rules, which may consider where the contract was signed, performed, or litigated, leading to uncertainty.
  5. Should international contracts include governing law clauses?
    Yes, but they require special care. Some countries may not recognize U.S. governing law clauses, so parties should consult counsel familiar with cross-border rules.

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