What is a governing law clause?

Typically one of the very last (but by no means least important) clauses you’ll find in a legal agreement is the governing law clause. It determines in what jurisdiction potential disputes are resolved. If no governing law clause is included (which is uncommon), the plaintiff will typically choose the jurisdiction in which they want to bring the case before court. This court may judge the case must be resolved elsewhere. 

This alone makes it an essential clause because including it provides clarity and predictability by designating the legal framework that will apply, even if the parties are operating in different regions or countries. By clearly stating the applicable law, all parties know which definitions and legal precedents will be applied, should any issues arise.

How to write a governing law clause?

To draft an effective governing law clause is quite simple and can be done in a couple sentences. To understand how to go about this, considering the following steps:

Must:

1. Determine the applicable jurisdiction:
   Typically this will be the jurisdiction in which your entity is based. You can further Identify which state or region’s laws will be applied. Overall this choice should align with the parties’ business operations, the location where most contractual activities take place, or where enforcement is most convenient.
   Tip: Geographical proximity is important too, should you be required to visit the Courts.
   
   
2. Clearly state the chosen law:
   Use unambiguous language. An example you can borrow is the followowing, “This Agreement shall be governed by and construed in accordance with the laws of [Jurisdiction].”

Optional:

3. Consider conflict of laws issues:
   If you and your counterparty are not based in the same jurisdiction, it could be worth acknowledging potential conflicts and specifying that the chosen law will prevail over any conflicting local laws.
   Best Practice: Address this upfront to reduce uncertainty in international or multi-jurisdictional contracts.
   
   
4. Supplementary Provisions:
   You might include related provisions such as a forum selection clause, which determines the location where disputes will be litigated. This can further enhance legal clarity and minimise jurisdictional complications.
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Why you shouldn't ignore the implications

• Predictability:
  By defining the legal framework in advance, both parties can better understand their rights and obligations under the contract.
• Enforceability:
  Make sure the clause is enforceable in all relevant jurisdictions. It’s possible that local laws may require certain types of disputes be heard in a specific forum regardless of the clause.
• Negotiation leverage:
  The selection of governing law can be a significant point in negotiations, especially in contracts involving international parties. Consider the strategic implications for both risk management and dispute resolution.

Conclusion

It should come as no surprise that this clause is found in virtually all legal agreements, given the huge impact it has on all other terms in the agreement. At the end of the day, this clause says something about how all the other terms are interpreted, enforced, and ultimately how any dispute over them is resolved. Though it is only a short clause, don’t underestimate its impact! 

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