Governing Law Clause: Choosing Law Versus Forum, and What It Does Not Decide

A governing law clause picks which state's (or country's) substantive law a court or arbitrator uses to read your contract. It decides how the words are interpreted, what counts as a breach, and how damages are measured. It does not decide where you litigate, and it does not guarantee that every claim arising from the deal will be judged under the law you chose. Those are separate questions, and treating them as one is a common mistake here.

Reviewed and corrected on 12 October 2026. This is general information, not legal advice; check the cited statute or opinion before relying on it.

TL;DR

• A governing law clause selects the substantive law that interprets the contract. It is distinct from the forum selection clause (where you sue) and the arbitration clause (whether you sue at all).
• Delaware and New York are common choices for sophisticated deals because each has a statute that supports the choice for larger contracts (6 Del. C. § 2708; N.Y. Gen. Oblig. Law § 5-1401). Many parties choose their own home state instead.
• Under Restatement (Second) of Conflict of Laws § 187, which many states follow, the parties' choice is generally enforced unless the chosen state has no substantial relationship to the parties or the deal and there is no other reasonable basis, or applying it would offend a fundamental policy of a state with a materially greater interest. Some statutes also protect employees and franchisees from an out-of-state choice.
• Whether the clause reaches tort or statutory claims depends on its wording and on the court. The Fifth Circuit held a clause saying the agreement "shall be governed by, and construed in accordance with" New York law was narrow and did not govern fraud claims, while the California Supreme Court held "governed by and construed in accordance with" Hong Kong law reached implied covenant and fiduciary duty claims arising out of the contract. Broad wording removes the doubt.
• Read governing law together with forum selection and arbitration. Picking New York law but a Texas forum, or one party's law but the other's courts, creates friction you can avoid.

What a governing law clause actually does

The clause answers one question: when a dispute is decided, whose rules of contract interpretation apply? That choice drives outcomes that look technical but move money.

It sets the interpretive rulebook. How an ambiguous term is read, whether an implied covenant of good faith exists and how broadly, what remedies are available, and how strictly the contract's words are enforced all vary by state. A liquidated damages amount that holds in one state can be struck as a penalty in another.

It does not set the courthouse. Governing law tells the decision-maker which law to apply. It does not tell you which court hears the case. A New York court can apply Delaware law, and a Delaware court can apply New York law. You need a separate forum selection clause to fix the location.

A well-drafted clause also says how far it reaches: contract claims only, or also tort and statutory claims "arising out of or relating to" the agreement. A clause limited to "governed by" and "construed in accordance with" invites a fight over its scope (see the next section).

Why it matters: the dollars at stake

Picture a $2,000,000 supply contract with a liquidated damages provision setting $250,000 for late delivery. The buyer is in California; the supplier insists on its home-state law.

• Under a state that enforces reasonable liquidated damages, the buyer collects the full $250,000 when delivery slips.
• Under a state that treats the same amount as an unenforceable penalty because it is not a genuine pre-estimate of loss, the buyer is thrown back on proving actual damages, which might be $40,000 and far harder to document.

Same breach, same dollar figure on the page, a $210,000 swing decided by which state's law reads the clause. That is why the governing law line, often skimmed as boilerplate, deserves real attention. (Illustrative example; actual outcomes turn on the specific state's law and facts.)

Who wants what

The pattern: each side prefers law it knows and that a local lawyer can advise on without hiring out-of-state counsel. A neutral state such as Delaware or New York is a common compromise because neither side has to litigate under the other's home law.

Market-standard language

A typical governing law clause for a US commercial agreement reads close to this:

GOVERNING LAW. This Agreement and any dispute or claim (including
non-contractual disputes or claims) arising out of or relating to this
Agreement or its subject matter or formation shall be governed by and
construed in accordance with the laws of the State of [Delaware],
without giving effect to any choice or conflict of law provision or
rule (whether of the State of [Delaware] or any other jurisdiction).

Three pieces are doing the work. The phrase "arising out of or relating to" is meant to widen the clause past pure contract claims to reach related tort and statutory claims. The "(including non-contractual disputes)" parenthetical makes that reach explicit so a court is less likely to read it narrowly. The "without giving effect to any conflict of law provision" addresses renvoi, the risk that the chosen state's own conflict-of-laws rules point to a third state's law. Restatement § 187(3) presumes that, "in the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law," so the words are inexpensive insurance more than a necessity. Delaware's statute uses similar words ("without regard to principles of conflict of laws").

The negotiation: standard, fallback, walk-away

If you cannot win your home state, the strongest fallback is a neutral state where the law is deep and predictable. New York and Delaware are common because both have extensive commercial case law, so outcomes are easier to forecast.

Common carve-outs and variations

Governing law clauses vary in scope and in how they interact with specialized claims. The high-frequency variations:

• Broad versus narrow scope. "Governed by the laws of" alone has been read narrowly by some courts (Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719 (5th Cir. 2003)) and broadly by others (Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459 (1992)). Adding "any dispute arising out of or relating to" is meant to pull in related tort and statutory claims.
• Conflict-of-laws exclusion. Exclude the chosen state's own conflict rules. Restatement § 187(3) presumes the chosen state's local law by default, but the exclusion removes the argument.
• International deals. The UN Convention on Contracts for the International Sale of Goods (CISG) applies to contracts of sale of goods between parties whose places of business are in different States when those States are Contracting States, or when private international law leads to the law of a Contracting State (CISG art. 1(1)). Article 6 says "the parties may exclude the application of this Convention." One federal district court held that clauses adopting the "laws of" California, and the law of British Columbia, did not show a clear intent to opt out, while noting that naming a state's commercial code could amount to an implied exclusion (Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F. Supp. 2d 1142 (N.D. Cal. 2001)), so exclude it expressly if you want it out.
• Carve-outs for IP and equitable relief. Parties sometimes let injunctive relief for IP or confidentiality breaches be sought under the law of wherever the harm occurs.

A common international add-on looks like this:

The United Nations Convention on Contracts for the International Sale
of Goods does not apply to this Agreement.

Jurisdiction and enforceability notes

US courts generally honor a contractual choice of law, but the pick is not absolute:

• Reasonable relationship. Under Restatement (Second) of Conflict of Laws § 187(2)(a), as quoted by the California Supreme Court, the chosen law applies unless "the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice" (Nedlloyd). Many states follow § 187; several do not (see the state breakdown linked below). A state with no connection at all is more vulnerable to challenge.
• Fundamental public policy. Section 187(2)(b) also withholds the chosen law where applying it "would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue" and whose law would apply absent the clause. This is the main escape hatch.
• Non-waivable protections. Some statutes cannot be contracted around. California voids at the employee's request a provision that deprives an employee who primarily resides and works in California of the substantive protection of California law for a controversy arising in California, and then California law governs (Cal. Lab. Code § 925(a)(2), (b); it does not apply to an employee individually represented by counsel in negotiating the choice, § 925(e)). Washington's franchise act voids a "choice of law provision" that purports to waive compliance with the act (RCW 19.100.220(2)), and Minnesota's does the same for franchisees who are residents or whose franchise is operated in the state (Minn. Stat. § 80C.21). Other states have similar statutes for sales representatives, dealers and consumers; see the state breakdown linked below.
• Delaware and New York statutes. New York allows parties to a contract "covering in the aggregate not less than two hundred fifty thousand dollars" to choose New York law "whether or not such contract ... bears a reasonable relation to this state," but not in contracts for labor or personal services or personal, family or household services (N.Y. Gen. Oblig. Law § 5-1401). The Court of Appeals held that a conflict-of-laws analysis is then unnecessary (IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., 20 N.Y.3d 310 (2012)). A separate New York statute lets a person sue a foreign corporation or nonresident in New York on a contract of at least $1,000,000 that chooses New York law under section 5-1401 and includes a submission to New York courts (§ 5-1402). Delaware presumes a "significant, material and reasonable relationship" with the state when the parties are subject to Delaware courts or arbitration and can be served, but not for contracts "involving less than $100,000" (6 Del. C. § 2708). Neither statute answers the fundamental-policy question: a Delaware clause in a California employee's contract can be voided under Cal. Lab. Code § 925. Other states have comparable statutes with their own thresholds and exclusions; see the state breakdown linked below.

This is general information, not legal advice for a specific deal. Whether a court will honor your choice turns on the competing states' laws and the facts; confirm against the controlling law before you rely on it. For a state-by-state view of how these clauses are treated, see our choice-of-law clauses breakdown.

Review checklist: red flags to catch

• The clause picks a state with no connection to either party or the deal, inviting a public-policy challenge.
• Governing law is set but there is no forum selection clause, leaving location wide open.
• The scope is narrow ("governed by the laws of") so tort and statutory claims escape your chosen law.
• The chosen state's conflict-of-laws rules are not excluded, which leaves room for a renvoi argument.
• Law and forum point to different states, raising cost and unpredictability.
• For cross-border sales of goods, the CISG is not addressed, so it may apply.
• A consumer or employment counterparty where non-waivable protections quietly override your pick.

How it interacts with other clauses

The governing law clause is one leg of the dispute-resolution stool. Read it together with:

• Forum selection: governing law picks the rulebook, forum selection picks the courthouse. You need both.
• Arbitration: if disputes go to arbitration, governing law still tells the arbitrator which substantive law to apply.
• Liquidated damages: whether an agreed sum is enforced or struck as a penalty turns directly on the chosen law.
• Waiver of jury trial: the enforceability of a pre-dispute jury waiver depends on the governing state's rules.

For the broader workflow, see the in-house contract review playbook.

FAQ

What is a governing law clause? It is a contract provision that selects which jurisdiction's substantive law will be used to interpret the agreement and resolve disputes about it. It controls how the contract is read, what counts as a breach, and how remedies are measured.

What is the difference between governing law and forum selection? Governing law picks which state's or country's law applies. Forum selection picks where the dispute is heard. They are separate: a court in one state can and often does apply another state's law. You generally want both clauses, and usually pointing to the same place.

Why do so many contracts choose Delaware or New York law? Both states have extensive commercial case law, which makes outcomes easier to forecast, and both have statutes that support the choice for larger contracts ($250,000 in New York, $100,000 in Delaware). That makes them common neutral picks when neither side wants the other's home law.

Can a court ignore the governing law clause? Sometimes. Under Restatement § 187, a court may decline to apply the chosen law if the state has no substantial relationship to the deal and there is no other reasonable basis for the choice, or if applying it would be contrary to a fundamental policy of a state with a materially greater interest. Statutes such as California Labor Code § 925 can also override the choice for employees.

Does a governing law clause cover tort and statutory claims? It depends on the wording and the court. Some courts read "governed by the laws of" narrowly and others read it to reach claims arising out of the contract. Adding "any dispute arising out of or relating to this Agreement, including non-contractual claims" is the drafting fix.

Should I exclude conflict-of-laws rules? Yes, it is standard. Restatement § 187(3) presumes the reference is to the chosen state's local law absent a contrary indication, but the phrase "without giving effect to any conflict of law provision" removes any argument that the chosen state's conflict rules point elsewhere.

Does choosing a country's law settle international disputes? Not by itself. For a cross-border sale of goods between parties in different Contracting States, the CISG can apply unless the parties exclude it (art. 6), and at least one federal court held that a general choice of a state's law did not show a clear intent to opt out. You also need a separate forum or arbitration clause to fix where the dispute is resolved.

Arshita Anand

Co-Founder & CEO · Attorney

Arshita leads product and strategy at Vaquill AI, the US primary law data API. As an attorney, she decides which law we carry, how each section is sourced and cited, and what legal AI and compliance teams need from the data.