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Governing Law: Everything you need to know

Updated: Apr 16, 2023

A "Governing Law" clause is a clause used in legal agreements that specifies which rules and laws will apply in the event of a legal dispute.

A commercial contract establishes the terms under which the contracting parties will do business. However, depending on which country's laws govern them, the meaning and effect of those terms can differ significantly. A governing law clause aims to express the parties' preference for the applicable law. These clauses are usually included in standard Terms and Conditions agreements for websites or mobile applications.

For agreements in the United States, the governing law can be of a specific state or a specific country if the agreement is international. Although most state laws in the United States are fairly consistent from state to state, laws vary greatly from country to country, so this is a particularly significant provision in Terms and Conditions for international customers.

While you do have the option of declaring which state's or country's laws you want to use, you can't pick and choose. Courts will examine the governing law you choose in your contract and then search for a link between that location and either the transaction or a portion of it, or at least one of the parties.

Importance of "Governing law" clause in a contract

A Governing Law clause is useful because it lets the users understand your terms. The more details you can provide your users about the terms they're agreeing to, the better. Parties gain clarity by including a governing law clause: they know what law will be applied to determine questions about their rights and responsibilities under the contract. Another reason is to save time and resources on potential lawsuits, which is more likely if there is no governing law at all.

If a conflict arises concerning an agreement that lacks a governing law or jurisdiction clause, the contract will be governed by the law of the jurisdiction with the strongest ties to the contract. To determine which jurisdiction law is best suited for a fair trial, the court will have to consider factors such as the parties' residence and the location of the contract. This was emphasized by Mr. Justice Mann's remarks in the case of Apple Corps Ltd vs. Apple Computer Inc.

In this case, neither of the parties was willing to give the other the advantage by agreeing to respective jurisdictions. This clearly shows the importance of having a governing clause. If either one of them had the clause in their "Terms of Service", the dispute could have been avoided. The complainant would have been forced to accept the jurisdiction as present in the "Terms of Service" of the defendant.

Governing Law vs. Jurisdiction

It is easy to get confused between governing law and jurisdiction. Therefore, it is important to understand the difference between the two. Jurisdiction refers to the court or court system where your case will be heard. To clarify, this assertion jurisdiction can refer to a country's state courts, while governing law can refer to a different country's state laws. For example, a jurisdiction might be something like "state courts of New York," with "state laws of New York" as the governing rule.

To put it another way, regulating law may be enforced regardless of jurisdiction, or, to be more specific, a law clause does not have to fit a jurisdiction clause. This means that a governing rule from another state, such as Florida, can be applied in a court case heard by California state. Instead of having two separate provisions, many companies opt to include jurisdiction details as part of their governing rule. Here is an article to give you a better and detailed understanding of how the following two clauses are drafted.

Here are some examples of governing law clauses found in the website and mobile app legal agreements. Even though you have the option of choosing your governing law, some businesses may choose not to do so.

  • The Terms of Service of Native Union allows them to retain a great deal of control over legal matters by establishing a very broad jurisdiction clause. This clause preserves Native Union's right to decide which country, state, province, or territory will have jurisdiction on a case-by-case basis. They're saying that there is a governing law and that it will be determined by them in the future.

  • Amazon, which operates in over 200 countries, has a separate governing law clause for each country's service. For Amazon US and its Terms of Service agreement, the "Applicable Law" clause declares that the laws of the state of Washington will govern any conflicts between it and a user from the United States. The same clause - "Applicable Law" - appears in the Amazon UK Conditions of Use and Sale agreement but with different country-specific details.

Factors to consider while choosing the governing law clause Contracting parties are free to select their governing law, which does not have to be related to the location of the contracting parties or the contract's subject matter. In practice, the parties' choice of law is often simple, based on market practice or familiarity with the law. However, here are few points to consider before deciding on governing law.

Consistency between governing law and jurisdiction Owing to the increased cost of litigation and the possibility that the court will apply the foreign law inappropriately, parties will generally want consistency between their governing law clause and jurisdiction clause. For example, If a conflict is to be settled in English courts, English law should be used. However, if the parties agree, for instance, that their contract will be governed by French law but that conflicts will be resolved by English courts, the parties will be required to provide expert proof on French law for the English court to decide the related issues.

Decides the law applicable In some cases, the parties' choice of law for the contract may also determine the law that applies to any problems arising from the parties' pre-contractual dealings. This may be a compelling reason to choose English law, which, unlike other civil law systems, lacks an established body of law requiring a duty of good faith in pre-contractual negotiations.

Reasons for selecting a law There may be technical reasons for selecting a specific law. One of the reasons for using English or New York law in finance transactions, for example, is that they both understand the principle of trust.

The clarity in the chosen legal framework Be certain that you correctly explain the legal framework that you wish to use. For example, instead of "US law," say "New York law."

Laws upheld by courts Finally, make sure you choose a legal scheme that will be upheld by the courts. The Rome I Regulation (which is still in effect in the UK as EU law) stipulates that the law of a "nation" be chosen. Parties should include a clause for arbitration if they wish their partnership to be regulated by a law other than the law of their country. Section 46 of the Arbitration Act, in particular, specifically recognizes that arbitral tribunals may and should resolve disputes using the law preferred by the parties.

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