The Governing Law, or Choice of Law, clause specifies that the laws of a mutually agreed upon jurisdiction will govern the interpretation and enforcement 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.
Governing Law. This Agreement shall be governed, construed, and enforced in accordance with the laws of the State of [GOVERNING LAW STATE], without regard to its conflict of laws rules.
Narrow and Broad Clauses
Narrowly defined clauses state that the agreement shall be governed by and construed in accordance with the laws of the governing law state.
Example: This Agreement shall be governed by and construed in accordance with the laws of the State of [GOVERNING LAW STATE], without regard to its conflict of laws rules.
Broadly defined clauses, such as the ContractStandards clause, state that the agreement shall be construed and enforced in accordance with the laws of the governing law state.
Example: This Agreement shall be governed, construed, and enforced in accordance with the laws of the State of [GOVERNING LAW STATE], without regard to its conflict of laws rules.
Alternate Conflict Exclusion Language
This agreement shall be governed by, and construed in accordance with, the [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
(b) applicable to agreements made and to be performed solely therein, without giving effect to principles of conflicts of law
(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
Example: 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)
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."
In Caton v. Leach Corporation (5th Cir. 1990), the court held that a choice of law clause stating that '[this] Agreement shall be construed under the laws of the state of California' was a narrow clause that did not encompass the entirety of the parties’ relationship. The court explained: "In contrast to broad clauses, which choose a particular state's law to ‘govern, construe and enforce all of the rights and duties of the parties arising from or relating in any way to the subject matter of this contract,’ the instant clause denotes only that California law will be applied to ‘construe’ the contract." Id. at 942 n.3. The court explained that claims arising in tort do not arise out of the contract. Thus, to decide which states’ law applied to the tort claims asserted in the litigation between the parties, the court looked to the conflicts of laws rules of the forum state, Texas, which held that "the law of the state with the most significant relationship to the particular substantive issue will be applied to resolve that issue.' Id."
The court in Caton v. Leach Corporation provided an example of broad language: The law of [fill in the blank] state shall govern, construe and enforce all of the rights and duties of the parties arising from or relating in any way to the subject matter of this contract.”
In English Mt. Spring Water Co. v. AIDCO Int'l, Inc., 2008 U.S. Dist. LEXIS 43478 (E.D. Tenn. 2008), the court held that a choice of law clause that stated "Resolution of disputes shall be conducted in accordance with the laws of the State of Michigan” was a broad provision that covered the entirety of the parties’ dispute and not just the construction of the contract itself."
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." Choice of Law Provisions in Contracts. Nolo Press
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."