Understanding the “Governing Law” or “State of Law” Provision in Contracts

When entering into a legal contract, it’s crucial to understand the terms that govern your agreement—especially the Governing Law or State of Law provision. Though it might seem like a formality, this clause can have a major impact on how disputes are resolved, which laws apply, and where legal proceedings may occur.

What Is a Governing Law Provision?

A Governing Law clause (also called a choice of law or state of law clause) specifies which state’s laws will be used to interpret and enforce the contract.

This is especially important when the parties are located in different states or countries, as laws around contracts, liability, and damages can vary widely between jurisdictions.

Why It Matters

Without a clear governing law clause:

• Disputes may become more complicated and costly.

• Courts may need to determine which state law applies.

• Legal uncertainty can arise, especially in multi-state transactions.

A properly written clause reduces ambiguity, saves time, and adds predictability for both parties.

Sample Governing Law Clauses

Here are two common examples:

“This Agreement shall be governed by and construed in accordance with the laws of the State of California.”

“The laws of the State of New York, without regard to its conflict of laws principles, shall govern this Agreement.”

How to Choose the Right State Law

When selecting a governing law:

• Consider the state where your business is based.

• Evaluate the legal system’s reputation and predictability.

• Some states (like Delaware) are known for favorable and established corporate law frameworks.

Choose a jurisdiction that aligns with your interests and legal strategy. Just remember, you can't just choose any state as there has to be some type of connection to that state so that the state's court can gain jurisdiction. For instance, if your business is registered in North Carolina, but your principal place of business is in South Carolina, then you may choose either state as the governing law. You wouldn't choose Texas if there is no relation to Texas. More on jurisdiction in another post, but you get the gist here.

Enforceability Considerations

Courts generally respect governing law clauses if:

• The chosen state has a reasonable connection to the agreement or parties.

• The clause does not conflict with public policy.

However, courts may refuse to apply the chosen law if it lacks connection to the contract or causes an unfair outcome.

Final Thoughts

The governing law provision is more than just legal boilerplate. It’s a critical clause that shapes how your contract will be interpreted and enforced.

Before signing any agreement, consult a qualified attorney to ensure the governing law aligns with your business needs and risk tolerance.

If you are unsure about which state's law are available to you in regards to your contract, or if you want to ensure you understand the choice of law provision in a current agreement, feel free to schedule a consultation! I'd love to help.