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.
Applicable Law. This agreement will be governed by and construed in accordance with the substantive laws in force in:
the State of California, if a license to the Software is purchased when you are in the United States, Canada, or Mexico; or
Japan, if a license to the Software is purchased when you are in Japan, China, Korea, or other Southeast Asian country where all official languages are written in either an ideographic script (e.g., hanzi, kanji, or hanja), and/or other script based upon or similar in structure to an ideographic script, such as hangul or kana; or
England, if a license to the Software is purchased when you are in any jurisdiction not described above.
Jurisdiction. The respective courts of Santa Clara County, California when California law applies, Tokyo District Court in Japan, when Japanese law applies, and the competent courts of London, England, when the law of England applies, shall each have non-exclusive jurisdiction over all disputes relating to this agreement.
United Nations Convention on Contracts. This agreement will not be governed by the conflict of law rules of any jurisdiction or the United Nations Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded.
Governing Law and Consent to Jurisdiction and Venue
Governing Law. This agreement, and any dispute arising out of the [SUBJECT MATTER OF THE AGREEMENT
Consent to Jurisdiction. Each party hereby irrevocably consents to the [exclusive, non-exclusive] jurisdiction and venue of any [state or federal] court located within [VENUE COUNTY] County, State of [VENUE STATE], in connection with any matter arising out of this [agreement / plan] or the transactions contemplated under this [agreement / plan].
Consent to Service. Each party hereby irrevocably
agrees that process may be served on it in any manner authorized by the Laws of the State of [GOVERNING LAW STATE], and
waives any objection which it might otherwise have to service of process under the Laws of the State of [GOVERNING LAW STATE].
Governing Law. This agreement and any matter or dispute arising out of or related to the subject matter of the 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.
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 a 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.
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 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."
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.
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.
Some commentators argue that the standard broad and narrow governing law clauses are too easily interpreted as under– or over–inclusive, either
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].
For more on Adams' suggestions, see Kenneth A. Adams, A Manual of Style for Contract Drafting 13.26–13.32 (3d ed. 2013).
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
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
"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
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