The law governing contracts is very clear-cut, depending on the type of contract you have entered into. Using a written contract when you want to make an agreement with another party is the best way to ensure it is fully enforceable if a dispute were to arise. A contract spells out all of your rights as well as the rights of the other party.

Should you want to get out of your contract, there is a section included that will allow you to do so if you choose to include that clause in your contract. Contracts are very important in the course of doing any sort of business.

What Is a Contract?

A contract is a type of document used to enforce agreements between two parties. It creates an obligation to take or not to take certain actions. A party can be one person or a company. Despite who the parties are, a contract has to contain the following:

  • Competent parties can only enter a contract. Those who are mentally disabled or coerced in any way cannot enter into a contract. A minor could enter a contract, but it can be voided before the age of maturity.
  • The agreement has to be mutual between all parties. There has to be a meeting of the minds on the topic. All parties have to make promises to take an action that the party is not required by law to perform.

What Laws Govern Contracts?

Contracts have a choice of law or a governing law provision that lets the parties agree that a certain state’s laws will be followed when interpreting the deal. This can be the case if the agreement takes place in a completely different state.

The Governing Law or the Choice of Law clause states that the laws of the jurisdiction that was decided on mutually will govern the enforcement of the contract.

Having a say in the governing law is a very important component for all parties because the differences in laws in different jurisdictions could result in different outcomes. The choice of jurisdiction is different than the venue.

Parties can opt to choose different jurisdictions based on the dispute type. The courts typically will respect the selection of the parties.

If you are negotiating an international contract, you have to be careful when you are considering dispute resolution clauses and governing law. Most contracts are governed by the laws of the state where it was created.

The choice of law provision could also be problematic if it is in an insurance contract. Some states will want to ensure their consumer protection laws with regard to insurance will apply within their own borders.

A contract could be governed by two different types of state law, depending on the subject of the contract:

  1. Common Law: The bulk of most contracts are controlled by common law in most states. This is a traditional set of laws that are that are made by judges based on different court decisions throughout history.
  2. The Uniform Commercial Code: The common law cannot control any contract that is meant for the sale of goods. These are controlled by the UCC.

The differences are not generally major enough to create a negotiation problem for parties.

Governing Law Versus Jurisdiction

The jurisdiction refers to the location in which the dispute will be heard and resolved. The governing law will indicate which state law will be applied during the dispute. It is possible that a contract signed in New York needs to be disputed using California law since that was the mutually agreed upon jurisdiction.

Choosing a state for governing law is not typically a major issue in negotiations. However, the selection of jurisdiction can be more crucial. If there is a dispute in your contract, you have to go to the chosen jurisdiction to dispute it. This can cost you a lot of money if the jurisdiction is located a long distance from where you live and work.

What Does a Choice of Law Provision Look Like?

Within the body of a contract, the choice of law provision is quite short, mostly summed up in one or two sentences.

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