Clause Guide

Governing Law clause: meaning, risks, and what to negotiate

Specifies which jurisdiction’s laws will govern how the contract is interpreted.

What it means

The governing law clause determines the legal framework applied to your contract, influencing how terms are interpreted, what rights and remedies are available, and how predictable dispute outcomes will be. Different jurisdictions can vary significantly in areas like contract interpretation, liability limits, enforceability of clauses, and procedural fairness. Choosing the wrong jurisdiction can increase legal costs, create uncertainty, and put you at a strategic disadvantage in disputes.

Common risks

11 risks identified

The chosen jurisdiction may be more favorable to the other party (e.g., pro-business vs pro-consumer bias).

You may be subject to unfamiliar legal principles, increasing reliance on external legal counsel.

Higher legal costs due to needing lawyers qualified in a foreign jurisdiction.

Inconsistency between governing law and dispute resolution (e.g., law in one country, courts in another).

Unexpected enforceability outcomes (e.g., certain clauses valid in one jurisdiction but invalid in another).

Reduced ability to predict outcomes due to unfamiliar case law or legal standards.

Increased complexity in cross-border enforcement of judgments.

Choice of law clauses that override otherwise applicable local protections.

Use of obscure or strategically chosen jurisdictions to disadvantage one party.

Potential conflicts with mandatory laws that cannot be contracted out of (e.g., consumer or employment protections).

Longer dispute timelines if the governing law complicates proceedings.

What to check before signing

Checklist

Which country, state, or jurisdiction’s law applies?

Is the jurisdiction neutral, or does it strongly favor one party?

Does the governing law align with the dispute resolution clause (courts or arbitration)?

Are there differences in how key clauses (e.g., liability, termination) are treated under that law?

Will you need local legal counsel to interpret or enforce the agreement?

Are there mandatory local laws that may override the chosen governing law?

Is the jurisdiction commonly used and commercially reasonable (e.g., England & Wales, New York, Delaware)?

Does the clause exclude conflict of laws rules (standard but important wording)?

Are there enforcement challenges if the counterparty is located elsewhere?

Does the governing law align with where the contract is performed?

Negotiation ideas

Actionable

Use a neutral and widely accepted jurisdiction (e.g., England & Wales, New York) where possible.

Align governing law with the dispute resolution forum to reduce complexity.

Avoid jurisdictions that are unfamiliar, remote, or strategically chosen by the other party.

If you must accept a foreign jurisdiction, ensure clarity on how disputes will be handled.

Negotiate for a jurisdiction where you have legal familiarity or operational presence.

Consider arbitration with a neutral seat if parties are in different countries.

Ensure key clauses (e.g., limitation of liability) are enforceable under the chosen law.

Remove or review any unusual or non-standard legal systems.

Clarify that mandatory protections (if relevant) still apply where required.

Example clause

This Agreement and any dispute arising out of or relating to it shall be governed by and construed in accordance with the laws of England and Wales, without regard to conflict of laws principles.

Frequently asked questions

8 questions

Is governing law the same as jurisdiction or venue?

No. Governing law determines which legal rules apply, while jurisdiction or venue determines where disputes are heard (e.g., which court or arbitration forum).

Can governing law be different from where the parties are located?

Yes. Contracts often choose neutral or commercially favorable jurisdictions even if neither party is based there.

Why do companies choose places like Delaware or England & Wales?

These jurisdictions have well-developed, predictable legal systems and are widely used in commercial contracts, making outcomes more consistent.

Can I challenge a governing law clause?

It can be difficult, but courts may disregard it if it conflicts with mandatory laws or is deemed unreasonable in certain contexts.

Does governing law affect enforceability?

Yes. Some clauses (like non-competes or liability limits) may be enforceable in one jurisdiction but not in another.

What happens if governing law and jurisdiction don’t match?

This can create complexity, as a court may need to apply foreign law, increasing costs and uncertainty.

Is arbitration affected by governing law?

Yes. Even in arbitration, the governing law determines how the contract is interpreted, while the arbitration seat affects procedure.

What is 'without regard to conflict of laws principles'?

This standard wording prevents the chosen jurisdiction from referring the matter to another jurisdiction’s laws.

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