Governing Law Clause

What a Governing Law Clause Does

The governing law clause in a contract picks the body of law that will be used to interpret the contract and decide any dispute about it. It answers the question “whose law applies?” but not “whose courts hear it?” The latter is the job of a separate forum-selection or arbitration clause. Both clauses are usually present in well-drafted contracts but they are conceptually distinct.

The clause is typically short: “This Agreement is governed by and construed in accordance with the laws of the State of New York, without regard to its conflict-of-laws principles.” The phrase “without regard to its conflict-of-laws principles” is important. It blocks the chosen state’s own choice-of-law rules from kicking the question back to a different state’s substantive law, which would defeat the purpose of choosing in the first place.

Restatement (Second) Section 187: The Party-Autonomy Rule

US courts almost universally apply Restatement (Second) of Conflict of Laws section 187 (1971) to decide whether the parties’ choice will be honoured. Section 187 has two prongs.

Section 187(1). “The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.” For matters the parties could have written into the contract themselves (most ordinary commercial terms), the chosen law applies essentially without limitation. This is the broad, party-friendly prong.

Section 187(2). For issues the parties could not have resolved themselves by contract (mandatory rules of law, public-policy questions), the chosen law still applies unless either:

• “(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
• (b) application of the law of the chosen state 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 which, under the rule of section 188, would be the state of the applicable law.”

The substantial-relationship test in section 187(2)(a) is the reason a New York choice-of-law clause is reliable when one of the parties is a New York entity, the contract is negotiated in New York, or some performance happens in New York. It is also why Delaware works for any corporate-law-related question involving a Delaware entity.

The fundamental-policy override in section 187(2)(b) is the most-litigated piece. Courts have applied it to refuse enforcement of chosen-law clauses that would override employee-protective statutes, consumer-protective statutes, non-compete restrictions, or franchise-protective statutes of a state with a stronger interest. The override is narrow but real: it is not a general escape hatch, only a limited one for genuinely fundamental policies.

Why Delaware, New York, and English Law Are Common Defaults

Three jurisdictions show up disproportionately in US commercial and US-international contracts.

Delaware. Delaware has the deepest body of US corporate-law jurisprudence and the specialised Delaware Court of Chancery. For any contract touching on entity governance, equity, or M&A, Delaware law is the dominant choice. Delaware also has its own statute, 6 Del. C. section 2708, expressly permitting parties to choose Delaware law for any contract of US$ 100,000 or more even without a Delaware nexus.

New York. New York is the centre of US financial-services and large-commercial contracting, with a deep body of contract jurisprudence and the New York Convention’s strong enforcement of arbitration awards. NY General Obligations Law section 5-1401 permits parties to choose New York law for any contract of US$ 250,000 or more without requiring a New York nexus. New York is also the default for international contracts where neither side wants the other’s home law.

English law. Outside the US, English law plays a similar role as the neutral, commercially-experienced default. It is widely chosen for cross-border commercial contracts (especially trade, finance, shipping, and commodities) and for technology contracts where one side is in Europe or Asia and neither wants the other’s home law. London is a leading arbitration seat for the same reasons.

For US companies engaging international contractors, the typical defaults are New York law (US-favourable, statutorily protected, internationally credible) or English law (neutral, internationally credible, well-understood in arbitration).

How Courts Evaluate the Chosen Law

The substantial-relationship inquiry in section 187 is fact-driven. Courts have found a sufficient relationship from circumstances like:

• One party is incorporated or has its principal place of business in the chosen state
• The contract was negotiated, signed, or to be performed in the chosen state
• The chosen state hosts a material asset connected with the transaction
• The chosen state has a regulatory connection to the subject matter

The “no substantial relationship” finding tends to come up only in extreme cases (parties from two unrelated states picking a third unrelated state with no connection at all). For most commercial contracts where the chosen state is the home of one of the parties or one of the recognised commercial centres, the clause is enforceable.

Where Omnivoo Helps

Omnivoo’s Contract Management templates default to a Delaware or New York governing-law selection for US customers (with the choice surfaced in the template flow), paired with a forum-selection clause aligned to the chosen law and a severability clause that preserves the rest of the agreement if any single provision is held unenforceable. The result is a contract that is predictable to litigate in the unlikely event a dispute arises, and that is consistent across every SOW under a single MSA.