Introduction

Imagine you’re baking a cake. You’ve got all the ingredients: flour, sugar, eggs, the works. But you’re following a recipe written in a language you don’t speak. Not ideal, right? That’s what a contract feels like without a governing law clause—a recipe for confusion and potential disaster.

What’s a governing law clause, anyway?

Let’s break it down. A governing law clause is a section in a contract that specifies which state’s or country’s laws will be used to interpret the contract. It’s like picking the rulebook for the game you’re about to play. Without this clause, you might find yourself tangled in a problem, trying to figure out which laws apply if things go south.

Read: Why you should always define deliverables in services agreements

Why is matters more than you think

At first glance, a governing law clause might seem like just another piece of legal fluff—one of those things that lawyers obsess over but doesn’t really matter in the grand scheme of things. Wrong. This clause is one of the most important parts of your contract. Here’s why:

1. Clarity and predicability: By choosing a specific jurisdiction’s laws to govern your contract, you’re setting clear expectations for both parties. Everyone knows the rules of the road, which reduces the risk of nasty surprises down the line.

2. Cost and convenience: If a dispute arises, the last thing you want is to be dragged into a court halfway across the country—or the world. A governing law clause can help you avoid costly and inconvenient litigation by keeping things close to home.

3. Legal nuances: Not all laws are created equal. Some jurisdictions have laws that are more favorable to businesses, while others might lean more towards protecting consumers. The governing law you choose can significantly impact the outcome of any legal dispute.

Let’s say you’re a California-based business entering into a contract with a supplier in New York. You both agree on all the important stuff—price, delivery times, quality standards—but you skip the governing law clause. A year later, there’s a disagreement over a late shipment. California’s laws might say one thing, New York’s another. Now you’re stuck in a legal tug-of-war, trying to figure out which state’s laws should apply. It’s a mess that could’ve been avoided with a simple governing law clause.

Read: The hidden dangers of auto-renewal clauses in contracts

Make the right choice

Choosing the right governing law isn’t just about picking the most convenient option; it’s about strategically thinking through which jurisdiction’s laws best align with your business goals. Here are a few tips:

• Consider the parties: If both parties are based in the same state, it often makes sense to choose that state’s laws. But if you’re dealing with someone in another state or country, you’ll need to weigh the pros and cons.

• Think about the future: Don’t just think about what’s convenient now. Consider where your business might be in a few years. Could a change in jurisdiction benefit—or hurt—you down the road?

• Consult a lawyer: This one’s a no-brainer. A lawyer can help you understand the implications of different governing laws and guide you toward the best choice for your specific situation.

Common pitfalls and how to avoid them

Even with the best intentions, it’s easy to overlook key details when dealing with governing law clauses. Here are a few common pitfalls and how you can avoid them:

Forgetting to include the clause altogether

It’s surprising how often contracts are signed without any mention of governing law. This oversight can lead to ambiguity and costly disputes. The solution? Always include a governing law clause in your contracts, no matter how straightforward the agreement seems.

Choosing an unfamiliar jurisdiction

Choosing a state or country’s laws that you’re not familiar with can backfire. You might end up facing legal principles that don’t work in your favor. The solution? Stick to jurisdictions where you or your legal team have experience, or thoroughly research the implications before making a choice.

Ignoring potential conflicts of law

Just because you’ve picked a governing law doesn’t mean it will always apply. Courts sometimes look at factors beyond your chosen law, leading to unintended consequences. The solution? Be aware of how conflicts of law might come into play and consider including a clause that addresses this specifically.

Mismatching jurisdiction and venue

A governing law clause specifies the applicable law, but it doesn’t dictate where legal disputes will be resolved. If your governing law and dispute resolution venue are in different places, you could face logistical challenges. The solution? Align your governing law clause with a corresponding jurisdiction or venue clause to ensure consistency.

Read: NDAs 101: Why defining confidential information can make or break a deal

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

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Conclusion

A governing law clause might seem like a small detail, but it’s one that can have big consequences. It’s the difference between a smooth, predictable process and a potential legal nightmare. So, the next time you’re drafting or signing a contract, take a moment to think about that governing law clause. It could be the ingredient that makes—or breaks—your deal.