A governing law or choice of law clause specifies that the laws of a mutually agreed upon jurisdiction will govern the interpretation of the terms of the contract.
The choice of law jurisdiction need not be the same as the venue or choice of forum. The parties can even choose different jurisdictions depending on the type of dispute. In general, courts will respect the parties' selection.
The conflict of law language is used to prevent the jurisdiction from applying the laws other another state. For example, a court in Texas may apply the laws of the State of New York, if they determine the cause of action arose in New York. The use of the conflicts exclusion clause is to apply the laws of chosen jurisdiction.
[internal OR domestic OR mandatory] laws of the state of [________],
(a) regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof OR
(b) applicable to agreements made and to be performed solely therein, without giving effect to principles of conflicts of law OR
(c) without giving effect to any choice or conflict of Law provision or rule (whether of the State of [________] of any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the State of [________].
This Agreement shall in all respects be governed by, and construed and interpreted in accordance with, the Laws of the State of New York without giving effect to any conflicts of law principles of such state that might refer the governance, construction or interpretation of this Agreement to the Laws of another jurisdiction. STOCK PURCHASE AGREEMENT dated as of September 30, 2010 between AMERICAN INTERNATIONAL GROUP, INC. and PRUDENTIAL FINANCIAL, INC. (Simpson Thacher & Bartlett LLP; Debevoise & Plimpton LLP)
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Scope—Narrow and Broad Clauses
The breadth of the clause determines whether or not a particular claim falls within the scope of a contractual choice of law clause. In general, courts will look to the forum state, and not the choice of law state, to determine the scope of the clause.
"The court will apply the law of the forum state to discern whether the clause is a 'narrow' or a 'broad' clause. That will determine whether the dispute is within the scope of the choice of law provision.
Conflict Exclusion—Circular Logic?
The language stating that the jurisdiction should apply its laws "without regard to its conflict of laws rules" may create circular logic since this language technically requires a court to also exclude the conflict of laws rules that permit the parties to select a law to govern their agreement. See,Alltel and How to Draft a Governing Law Provision, M&A Law Professor's Blog.
Governing Law Versus Jurisdiction
"Jurisdiction refers to where a dispute will be resolved; governing law indicates which state's law will be used to decide the dispute. It's possible, for example, for a contract to require lawsuits to be filed in California but decided under New York law. The selection of which state is used for governing law is not often a crucial negotiating issue. But the selection of the state for jurisdiction can be more important: If there's a dispute, that's where everyone will have to go to resolve it. Sometimes these two provisions are grouped into one paragraph."
Will the Parties Choice of Law be Honored?
In general, courts respect the choice of law agreed to by the parties in their contract. Section 187 of the Restatement (Second) of the Conflicts of Laws is widely followed and provides that a court will follow the law of the state chosen by the parties “to govern their contractual rights and duties . . . unless either (a) the chosen state has no substantial relationship to the parties or to the transaction or there is no other reasonable basis for the parties' choice; or (b) application of the law of the chosen state would be contrary to fundamental policy of a state which has a materially greater interest than the chosen state in the determination of a particular issue and which . . . would be the state of applicable law in the absence of an effective choice of law by the parties."