Governing Law Clauses: Why Jurisdiction Matters More Than You Think

When drafting contracts, many businesses treat governing law clauses as a mere formality. However, these clauses play a critical role in determining which jurisdiction’s laws will apply in the event of a dispute. In an increasingly globalized economy, the choice of governing law can have far-reaching implications for your business. This article explores the importance of governing law clauses, examines real-world cases, and provides practical tips for drafting and negotiating these provisions effectively.

What is a Governing Law Clause?

A governing law clause (also known as a choice of law clause) specifies which jurisdiction’s laws will govern the interpretation and enforcement of a contract. For example:

“This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict of laws principles.”

This clause is particularly important in cross-border contracts, where parties may be subject to different legal systems.

Why Governing Law Clauses Matter

1. Predictability and Consistency
   By specifying the governing law, parties can ensure that their contract will be interpreted consistently, reducing the risk of unexpected outcomes.
2. Avoiding Unfavorable Laws
   Some jurisdictions have laws that are more favorable to certain types of disputes. For example, U.S. courts are often seen as more business-friendly, while European courts may offer stronger consumer protections.
3. Enforceability of Judgments
   The choice of governing law can affect the enforceability of judgments in other jurisdictions. For example, a judgment from a U.S. court may be easier to enforce in another country than a judgment from a less recognized jurisdiction.

Case Studies: Lessons from Real-World Disputes

1. Case Study 1: The Cross-Border Contract Gone Wrong
   In Apple Inc. v. Samsung Electronics Co. (2012), a dispute over patent infringement highlighted the importance of governing law clauses. The contract specified that California law would govern, which allowed Apple to pursue its claims in a U.S. court. Had the contract specified Korean law, the outcome might have been very different.Lesson: Choose a governing law that aligns with your strategic interests.
2. Case Study 2: The Unenforceable Judgment
   In Yukos Capital S.A.R.L. v. OJSC Rosneft Oil Co. (2012), a UK court refused to enforce a Russian judgment because it was obtained through a process that violated English public policy. This case underscores the importance of selecting a governing law that will produce enforceable judgments.Lesson: Consider the enforceability of judgments when choosing a governing law.
3. Case Study 3: The Hidden Costs of Local Laws
   In a dispute between a U.S. company and a Chinese supplier, the contract specified that Chinese law would govern. When a dispute arose, the U.S. company found itself facing unfamiliar legal procedures and higher costs in a Chinese court.Lesson: Be aware of the practical implications of choosing a foreign governing law.

Key Legal Principles

1. Freedom of Choice
   Most jurisdictions allow parties to choose the governing law of their contract, provided the choice is made in good faith and does not violate public policy.
2. Mandatory Rules
   Some jurisdictions have mandatory rules that cannot be overridden by a governing law clause. For example, EU consumer protection laws may apply regardless of the chosen governing law.
3. Conflict of Laws
   In the absence of a governing law clause, courts will apply conflict of laws principles to determine which jurisdiction’s laws apply. This can lead to unpredictable outcomes.

Practical Tips for Drafting and Negotiating Governing Law Clauses

1. Choose a Neutral Jurisdiction
   In cross-border contracts, consider selecting a neutral jurisdiction that is acceptable to both parties. For example, many international contracts specify English or New York law.
2. Consider the Forum
   The governing law clause should align with the forum selection clause (which specifies where disputes will be resolved). For example, if disputes will be resolved in a U.S. court, it makes sense to specify U.S. law.
3. Address Mandatory Rules
   If your contract involves jurisdictions with mandatory rules (e.g., EU consumer protection laws), include language that acknowledges these rules. For example:“This Agreement shall be governed by the laws of the State of New York, except where mandatory rules of another jurisdiction apply.”
4. Avoid Ambiguity
   Use clear and precise language to avoid disputes over the interpretation of the governing law clause. For example:“This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to its conflict of laws principles.”
5. Consult Local Counsel
   When dealing with foreign jurisdictions, consult local legal counsel to ensure that your governing law clause will be enforceable and that you understand the implications of the chosen law.

Conclusion

Governing law clauses are far more than just boilerplate provisions—they are strategic tools that can shape the outcome of disputes and protect your business interests. By understanding the legal principles, learning from real-world cases, and following practical drafting tips, you can create governing law clauses that provide clarity, predictability, and enforceability. Always consult legal professionals to ensure your contracts are tailored to your specific needs and jurisdiction.