Guidance

The Governing Law Clause and Common Law 

A governing law clause preempts the common law rules the forum court would otherwise use to decide the governing law. The freedom to contract—and thus respect for parties’ intent—is central to the American legal system. Therefore, courts first look to the parties' intent to determine the governing law.

A governing law clause is an explicit manifestation of the parties' intent and is typically respected by courts. If there is a governing law clause, the choice of governing law question is answered, and the case moves forward under the specified governing law. Governing law clauses are generally respected by courts. However, according to the Restatement (Second) of Conflict of Laws § 187, there are two situations in which courts may not respect a governing law clause. First, when the chosen jurisdiction has no substantial relation to the parties, and second when applying the chosen law would violate public policy interests of another jurisdiction with material interests in the case. 

Without a governing law clause, courts look for implied intent by the parties as to their choice of governing law. Courts have found virtually limitless grounds on which to "infer" from the parties' circumstances, actions, or lack thereof, what governing law the parties "intend." This creates greater uncertainty about what governing law will apply, making it even more important for the parties to use a governing law clause to explicitly manifest their intent.

John Prebble, Choice of Law in Contracts, 58 Cornell L. Rev. 636, 637 (1973).

Finally, when there is no explicit or implicit intent as to what jurisdiction’s law should govern, it is up to the forum court, according to its choice of law rules, to determine and apply the law of the jurisdiction that has the closest connection with the agreement and dispute.

Determining which jurisdiction has the closest connection depends on what part of the agreement is in dispute. For example, whether the dispute involves the formation of the contract, or the performance—or lack thereof—of the contract can change which jurisdiction has the closest connection.

Courts will consider the jurisdictions' interests when determining which jurisdiction has the closest connection. For example, courts will ask if there are public policy reasons for applying the law of a particular jurisdiction, or if a jurisdiction has a strong interest in the outcome of the case.

The Scope or Breadth of the Governing Law Clause

The breadth of the governing law clause determines whether or not a particular claim falls within the scope of the 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."

Drafting Choice of Law Clauses, Timothy Murray, Murray, Hogue & Lannis

Traditional Models of Governing Law Clauses: Broad and Narrow Clauses

Narrow Clauses

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."

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.

Broad Clauses

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."

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.

Drafting Choice of Law Clauses, Timothy Murray, Murray, Hogue & Lannis

Alternative Governing Law Clause: Activity and Subject Matter Model

Some commentators argue that the standard broad and narrow governing law clauses are too easily interpreted as under– or over-inclusive, either or which could undermine the control over the applicable law a governing law clause is meant to create. With this in mind, Ken Adams has proposed an alternative to the standard governing law clause.

Standard governing law clauses, whether broad or narrow, refer only to the agreement, i.e. “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.”

The alternative is for a governing law clause to explicitly refer to both the agreement and to the activities the parties will be engaging in over the course of the agreement. The activities could also be called the subject matter of the agreement.

For example, a governing law clause in a confidentiality agreement would read: Any disputes arising out of this agreement, or out of the use of any Confidential Information, shall be governed by the laws of the State of [GOVERNING LAW STATE].

To expand the scope of the governing law clause, simply specify an additional activity or subject matter. For example, to extend our example above to cover tort claims, use the following: Any disputes arising out of this agreement, including tort claims, or out of the use of any Confidential Information, shall be governed by the laws of the State of [GOVERNING LAW STATE].

"Arising Out Of or Related To"? No Thank You, Ken Adams.

For more on Adams' suggestions, see Kenneth A. Adams, A Manual of Style for Contract Drafting 13.26–13.32 (3d ed. 2013).

Redundancies in Governing Law Clauses

Once the core language of the governing law clause is chosen, the following areas present opportunities where extra language can be eliminated. The decision is up to the parties; it is a question of language efficiency, and including or removing the language will not affect the legal interpretation or enforcement of the clause.

Arising under, relating to: Instead of using both arising under and relating to, it is possible to use only one or the other. If you do choose to use one or the other, be consistent.

Governed by: Standard governing law clauses use "...interpreted construed and enforced under the law of the State of...". Alternatively, "Governed by" could be used on its own, replacing "interpreted, construed, and enforced under".

...Without regard to its conflict of laws rules: This language is included in standard governing law clauses so that the forum's own conflict of law rules do not override the clause, or, to prevent the application of renovi. Because this is the very objective of the clause, it is possible to omit this language.

Simplifying Governing-Law Provisions, Part 2 (Renvoi!), & Redundancy in Governing-Law Provisions, Ken Adams.

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."

Drafting Choice of Law Clauses, Timothy Murray, Murray, Hogue & Lannis

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  • Updated: 06/07/2021
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Overview

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. 

Controlling the governing law is an important objective for the parties because differences in local laws may control the outcome of a dispute.

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.