Governing law: Overview, definition, and example
What is governing law?
Governing law is the legal system or set of laws that will be used to interpret and enforce a contract. When parties from different states or countries enter into an agreement, the governing law clause decides which jurisdiction’s rules will apply if there’s a dispute. It ensures clarity and consistency by avoiding confusion about which laws govern the contract.
For example, a contract between a company in New York and one in California might state that New York law governs the agreement, even though the other party is based in California.
Why is governing law important?
Governing law is important because it provides certainty about how a contract will be interpreted and resolved in case of disputes. Without it, disagreements might lead to confusion or drawn-out legal battles over which state or country’s laws should apply. This is especially critical in contracts involving parties from different regions with different legal systems.
For businesses, a clear governing law clause reduces risks and makes it easier to plan for legal compliance. It allows parties to understand their rights and responsibilities within a specific legal framework.
Understanding governing law through an example
Imagine a software company in Texas signs a licensing agreement with a client in Florida. The contract includes a governing law clause stating that Texas law will apply to the agreement. If a dispute arises about payment or intellectual property rights, both parties know that Texas law will determine how the contract is interpreted and enforced. This avoids confusion and simplifies the resolution process.
Without a governing law clause, the parties might argue over whether Texas or Florida law should apply, leading to unnecessary delays and complications.
An example of a governing law clause
Here’s how a governing law clause might look in a contract:
“This Agreement shall be governed by and construed in accordance with the laws of the State of [Insert State], without regard to its conflict of law principles.”
Conclusion
A governing law clause establishes which legal system will apply to a contract, ensuring clarity and consistency in how disputes are handled. It reduces uncertainty and helps both parties navigate their rights and responsibilities within a specific legal framework.
By including a governing law clause in your contracts, you can avoid unnecessary confusion and set clear expectations for resolving disagreements. It’s a straightforward way to ensure fairness and legal certainty in business agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.