Governing Law Clause

When drafting a contract, it is crucial to consider the legal framework that will govern the agreement and the courts or tribunals that will have authority to resolve disputes arising from the contract. Governing law and jurisdiction are two distinct but related concepts that play an essential role in defining the contractual relationship between the parties. This article discusses the differences between governing law and jurisdiction in the context of contracts and provides examples of how commercial contracts address these issues.

Governing Law and Jurisdiction in Contracts

Governing law, also known as the choice of law, is a provision in a contract that specifies the legal system or body of law that will apply to the interpretation, validity, and enforcement of the agreement. The governing law provision allows the parties to agree in advance on the set of rules and principles that will govern their contractual relationship, providing predictability and consistency. The chosen governing law may be based on the location of the parties, the subject matter of the contract, or the parties' preference for a particular legal system.

Example 1 - Governing Law Clause:

"This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to its conflict of law principles."

This example demonstrates a governing law clause that specifies the contract will be governed by the laws of the State of California.

Jurisdiction, on the other hand, refers to the authority of a court or tribunal to hear and decide disputes arising from a contract. A jurisdiction clause in a contract identifies the courts or tribunals that the parties agree to submit any disputes arising out of or in connection with the contract. Jurisdiction may be exclusive, meaning that only the specified court or tribunal has authority over disputes, or non-exclusive, meaning that the parties may bring a dispute before other courts or tribunals with jurisdiction over the matter.

Example 2 - Exclusive Jurisdiction Clause:

"Any disputes arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of the state and federal courts located in the State of New York."

This example illustrates an exclusive jurisdiction clause, where the parties agree to submit any disputes to the state and federal courts in the State of New York.

Difference between Governing Law and Jurisdiction:

The primary difference between governing law and jurisdiction lies in their functions within a contract. Governing law determines the legal system and rules that apply to the contract's interpretation, validity, and enforcement. Jurisdiction, on the other hand, pertains to the authority of courts or tribunals to hear and decide disputes arising from the contract. While both concepts are interrelated, they serve different purposes in a contractual relationship.

Understanding the distinction between governing law and jurisdiction is critical when drafting a contract, as these provisions establish the legal framework and authority for resolving disputes. By including well-drafted governing law and jurisdiction clauses in commercial contracts, parties can ensure predictability and consistency in their contractual relationships and effectively manage potential disputes.