What it means
In simple terms, a governing law clause identifies which state's or country's laws will be used to interpret the terms of the contract and resolve any disputes. This means if there's a disagreement, the laws of the chosen jurisdiction will dictate how the situation is handled. For example, if you sign a contract governed by a specific state's laws, you may have to go to court in that state if issues arise. Misunderstanding this clause could lead to unexpected legal obligations or challenges, especially if the laws in that jurisdiction are significantly different from your own.
What to watch out for
If the governing law is from a far-away jurisdiction, it may be more difficult and costly for you to resolve disputes.
Look out for clauses that favor one party, such as requiring you to adhere to laws that are disadvantageous or unfamiliar.
Be cautious if the contract specifies a jurisdiction with strict laws that could impact your rights negatively.
Watch for vague language that doesn’t clearly define which laws apply, as this can lead to confusion later.
If the governing law clause is buried in fine print, it could indicate that the terms might not be in your best interest.
Common mistakes
Assuming that governing law will be the same as where you live can lead to unexpected surprises when disputes arise.
Not checking how the chosen jurisdiction's laws differ from your own can result in misunderstandings about your rights.
Overlooking the governing law clause altogether may mean you’re unprepared for legal challenges that could arise.
Failing to consider the practical implications of having to travel for legal matters in a different jurisdiction can lead to unforeseen costs.
Real-world example
Imagine you sign a contract for a service with a company based in another state that includes a governing law clause specifying that disputes will be resolved under that state's laws. Later, you encounter an issue with the service and need to take legal action. Because the contract states that the laws of that state apply, you may find yourself needing to navigate a legal system that operates under different rules than you're used to, potentially complicating your case and increasing costs.
Key terms
When to seek legal help
If you're unsure about the implications of the governing law clause in your contract, it might be worth seeking professional review. This is particularly important if the governing law is from a jurisdiction you're not familiar with or if the terms seem unusually one-sided. Ask specific questions about how the chosen laws could affect your rights and obligations. Additionally, seek clarification on any vague language that could lead to confusion or disputes later.
FAQ
What does a governing law clause do?+
A governing law clause specifies which jurisdiction's laws will apply to a contract. This affects how disputes are resolved and which legal standards are used.
Can I negotiate the governing law clause?+
Yes, you can negotiate the governing law clause before signing a contract. If you feel uncomfortable with the chosen jurisdiction, discuss alternatives that may be more favorable to you.
What happens if my contract doesn't have a governing law clause?+
If there's no governing law clause, the court may determine which jurisdiction's laws apply based on various factors, which could lead to unpredictability.
How can a governing law clause affect my rights?+
The governing law clause can significantly impact your rights depending on the laws of the specified jurisdiction, which may differ from those in your own area.
Is a governing law clause always necessary?+
While it's not always necessary, having a governing law clause can provide clarity and predictability in case of disputes, especially in contracts involving parties from different locations.
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