What Is Governing Law in Contracts?
Introduction
Every contract must operate under a specific legal framework. This framework is determined by the governing law chosen by the parties. Understanding the governing law in contracts is critical because it affects how disputes are resolved, how terms are interpreted, and which legal obligations apply.
Whether drafting a new agreement or reviewing an existing one, knowing how a governing law clause works ensures clarity, consistency, and reduced contractual risk.
Definition
Governing law (also called the contract governing law, choice of law clause, or applicable law) refers to the legal system and body of substantive law that will apply in the agreement.
A simple governing law in a contract definition:
“A contractual provision that identifies which jurisdiction’s laws will be used to interpret, enforce, and resolve disputes under the contract.”
This is different from jurisdiction, which determines where disputes will be heard. The governing law provision determines which legal rules apply.
Parties select their contract law governing state, which may be favourable for specific industries (e.g., a contract law governing state favorable to lessor in lease agreements).
Key Terms, Elements, and Clauses
A strong contract governing law clause typically includes:
- Governing Law Statement
Clearly identifies the law in contract (e.g., “This Agreement shall be governed by the laws of the Republic of South Africa…”).
- Jurisdiction Clause in Contracts
Separates governing law from where disputes will be resolved.
Often seen as:
- Agreement jurisdiction clause
- Jurisdiction and governing law
- Law and jurisdiction
- Choice of Law Provision
Explains why a certain law applies.
May include wording such as “without regard to conflict of law principles.”
- Change of Law Provision
Specifies how the contract adapts to new or amended laws.
- Substantive Law vs Procedural Law
The governing law clause affects only the substantive legal rules, not courtroom procedures.
- Contract Law Clauses Interaction
Ensures consistency across:
- Limitation of liability
- Warranties
- Indemnities
- Personal service obligations (e.g., what does the law require for a personal service contract)
- Sample Choice of Law Clause
Contracts often include a standard clause such as:
“This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of law principles.”
Types of Governing Law Clauses
- Standard Governing Law Clause
Identifies the contract law governing state without addressing jurisdiction.
- Governing Law and Jurisdiction Combined Clause
Links the applicable law with the venue where disputes will be heard.
- Split Clauses
Parties choose one state’s law and another state’s courts-less common and sometimes risky.
- International Choice of Law Clauses
Used when contracting across borders to define applicable law and jurisdiction clause in agreement.
When to Use a Governing Law Clause
A governing law clause is essential:
- In cross-border agreements
- When parties are in different provinces or states
- When industries rely on specific legal rules (banking, construction, software)
- When parties want predictable, stable legal outcomes
- When choosing a contract-friendly jurisdiction is strategic
- In complex commercial arrangements where clarity is crucial
Any agreement that lacks this clause risks ambiguity and increased legal cost
Benefits
- Legal Certainty
Parties know exactly which laws regarding contracts will apply.
- Predictable Outcomes
Ensures consistency when interpreting terms.
- Reduced Disputes
Avoids arguments over which contract law governing state should apply.
- Risk Reduction
The right governing law provision minimises exposure to unfavourable laws.
- Efficiency in Enforcement
Courts have clear guidance on how to interpret the contract.
Common Risks
If a contract lacks a clear governing law clause, parties face:
- Conflicts about which jurisdiction’s law applies
- Increased litigation time and cost
- Unpredictable interpretations of the contract
- Difficulties enforcing rights
- Exposure to unfavourable or unintended legal systems
Ambiguity in choice of law and jurisdiction is a major source of contract disputes.
Governing Law vs Jurisdiction
The two are related but not the same.
| Governing Law | Jurisdiction |
| Which laws apply | Which court or tribunal hears the dispute |
| Substantive rules | Procedural rules |
| May be separate from jurisdiction | Often aligned for convenience |
Example:
A contract may apply English law but require disputes to be resolved in South African courts.
Examples in Different Industries
- Technology & Software
Cloud providers choose jurisdictions with stable laws regarding contracts and strong IP protection.
- Construction
Cross-border EPC contracts often include a choice of law clause favourable to the Supplier or Client.
- Manufacturing & Supply Chain
Parties choose neutral jurisdictions to manage global supply risks.
- Public Sector
Agreements must align with law definition of contract under local procurement regulations.
- Professional Services
Service provider agreements often include wording “without regard to conflict of law principles” to ensure neutrality.
Managing Governing Law with Contract Corridor
Contract Corridor enables organisations to manage governing law requirements across thousands of agreements with ease.
- Automated Clause Libraries
Standardised law clause in contracts to ensure consistency.
- Configurable Templates
Embed preferred contract law clauses across all matter types.
- Jurisdiction and Governing Law Tracking
Quickly filter contracts by jurisdiction or contract governing law.
- Change of Law Monitoring
Stay ahead of regulatory shifts with automated alerts.
- Review and Compliance Workflows
Ensure every agreement meets internal & regulatory standards before signature.
- AI-Powered Clause Extraction
Instantly identify the governing law provision in legacy contracts.
- Complete Audit Trail
Track every change to the choice of law clause or jurisdiction reference.
Gain clarity, consistency, and full compliance across all your agreements. Schedule a Demo
