TL;DR: A governing law clause (also called a choice of law clause) specifies which jurisdiction's laws will apply to the interpretation and enforcement of the contract. It eliminates the uncertainty of conflict-of-laws analysis by selecting a single legal framework upfront. Key variables include the chosen jurisdiction, whether the clause covers formation and validity (not just interpretation), the exclusion of conflict-of-laws principles, the interaction with the jurisdiction and dispute resolution clauses, carve-outs for mandatory local laws, and the treatment of specific subject matters (IP, employment, real property) that may be governed by different laws.
What Is a Governing Law Clause?
A governing law clause designates the legal system that will govern the contract. When parties from different jurisdictions enter into an agreement, or when a dispute could theoretically be heard in multiple courts, the governing law clause answers the threshold question: which jurisdiction's contract law applies?
Without a governing law clause, courts apply conflict-of-laws principles to determine the applicable law. These principles vary by jurisdiction and produce unpredictable results. The Restatement (Second) of Conflict of Laws (used by most U.S. states) applies a multi-factor "most significant relationship" test. The Rome I Regulation (EU) applies the law of the country where the characteristic performer has its habitual residence. The result may be the law of a jurisdiction that neither party intended or anticipated. A governing law clause eliminates this uncertainty.
The clause is distinct from a jurisdiction clause (also called a forum selection clause), which determines where disputes will be heard. A contract might specify New York law as the governing law but designate London as the forum for dispute resolution. The court in London would then apply New York substantive law. The governing law clause and the jurisdiction clause are complementary but serve different functions.
Most governing law clauses include a carve-out for the chosen jurisdiction's conflict-of-laws principles. Without this exclusion, the court in the chosen jurisdiction might apply its own conflict-of-laws rules and conclude that a different jurisdiction's law should apply, defeating the purpose of the clause. The standard formulation is: "the laws of [jurisdiction], without regard to its conflict of laws principles."
Why It Matters
The governing law determines the substantive rights and obligations of the parties. Different jurisdictions interpret the same contract language differently, recognize different implied terms, and impose different limitations. The choice of governing law is not a formality; it is a substantive business decision.
Key Elements of a Well-Drafted Governing Law Clause
Market Position & Benchmarks
Where Does Your Clause Fall?
Market Data
Sample Language by Position
Vendor-Favorable: "This Agreement and all matters arising out of or relating to this Agreement, including any dispute regarding its existence, validity, or termination, shall be governed by and construed in accordance with the laws of the State of California, without regard to its conflict of laws provisions. The United Nations Convention on Contracts for the International Sale of Goods shall not apply."
Market Standard: "This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any choice or conflict of law provision or rule. The United Nations Convention on Contracts for the International Sale of Goods is expressly excluded. Nothing in this Section shall restrict the application of mandatory provisions of local law that cannot be derogated from by agreement."
Customer-Favorable: "This Agreement shall be governed by the laws of the jurisdiction in which Customer's principal office is located, as identified in the Order Form. Each party acknowledges that local consumer protection, data privacy, and employment laws applicable to Customer's operations shall apply to the extent they provide protections that cannot be waived by contract."
Example Clause Language
These examples show governing law provisions in different contract types.
International SaaS Agreement: "This Agreement, and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims), shall be governed by and construed in accordance with the laws of England and Wales. The parties agree that the United Nations Convention on Contracts for the International Sale of Goods does not apply to this Agreement. Nothing in this clause limits a party's right to seek interim relief in any court of competent jurisdiction."
M&A Purchase Agreement: "This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to any choice of law or conflict of law rules or provisions that would cause the application of the laws of any jurisdiction other than the State of Delaware. All questions concerning the construction, validity, and interpretation of this Agreement and the transactions contemplated hereby shall be governed by and construed in accordance with the domestic laws of the State of Delaware."
International Distribution Agreement: "This Agreement shall be governed by and construed in accordance with the laws of Singapore, without giving effect to principles of conflicts of law. The United Nations Convention on Contracts for the International Sale of Goods is expressly excluded. Notwithstanding the foregoing, matters relating to the Distributor's employment of its personnel shall be governed by the employment laws of the jurisdiction in which such personnel are located, and matters relating to intellectual property rights shall be governed by the laws of the jurisdiction in which such rights are registered or claimed."
Common Contract Types
Negotiation Playbook
Key Drafting Notes
Common Pitfalls
Jurisdiction Notes
United States: Choice-of-law clauses are generally enforceable under the Restatement (Second) of Conflict of Laws Section 187, provided the chosen jurisdiction has a substantial relationship to the transaction or a reasonable basis for the choice, and the chosen law does not contravene a fundamental policy of a jurisdiction with a materially greater interest. New York General Obligations Law Section 5-1401 provides that parties to contracts involving $250,000 or more may choose New York law regardless of the transaction's connection to New York. Delaware courts enforce choice-of-law clauses in corporate and commercial agreements as written. California courts are more willing to override choice-of-law clauses that conflict with California mandatory policies (e.g., employee non-competes).
European Union: The Rome I Regulation (EC 593/2008) governs choice of law for contractual obligations in EU member states. Article 3 provides that contracts shall be governed by the law chosen by the parties. Article 6 limits the effectiveness of choice-of-law clauses in consumer contracts: a choice of law may not deprive the consumer of protections afforded by the mandatory rules of their habitual residence. Article 8 provides similar protections for employment contracts. The regulation applies in all EU member states and provides a harmonized framework for choice-of-law analysis, making it more predictable than the U.S. approach.
United Kingdom: Post-Brexit, the UK retained the Rome I Regulation in domestic law through the Law Applicable to Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019. The rules are substantially identical to the EU Rome I Regulation. English law is one of the world's most commonly chosen governing laws for international commercial contracts, reflecting the perceived neutrality and commercial sophistication of English courts, the extensive body of commercial case law, and the London arbitration ecosystem. English courts enforce choice-of-law clauses with minimal scrutiny of the parties' reasons for the choice.
Related Clauses
This content is for informational purposes only and does not constitute legal advice. Market data represents general trends and may vary by industry, jurisdiction, and deal size. Consult qualified legal counsel for specific contract matters.
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