With globalization, many companies expand to other states or countries to grow their market or cut costs. International business offers many benefits, but it also carries risks. To reduce those risks, contracts should include a choice of law clause that states which laws will govern the agreement. Careful due diligence is key to protecting your business.

What is a Choice of Law Clause?

In a contract, a choice of law clause or governing law provision allows the parties to designate which state or country’s laws will dominate the interpretation of the contract, even if the contract was signed in or the party’s live in a different state.

A company may utilize many forms of interstate or international agreements, but the agreements them must clearly explain the rights and obligations of the parties involved.

Despite the fact that your contract is unique since it will reflect the demands and objectives of your organization, there are two elements in any agreement that you should always include:

• designation of governing law
• dispute resolution mechanism

Governing Law vs. Jurisdiction

• Governing law determines which laws will apply.

• Jurisdiction decides where disputes will be resolved.

For example, a contract may require lawsuits to be filed in Florida but reviewed under New York law. Governing law affects interpretation, while jurisdiction affects location.

Advantages of a Choice of Law Clause

• Eliminates confusion over which state’s laws apply.

• Saves time and money by speeding up dispute resolution.

• Gives peace of mind by using familiar laws.

Without this clause, parties may face long and costly disputes just to decide which law applies.

Avoid Ambiguity

Absent a governing law provision, there will be additional time and costs involved in identifying which country, state, or province has jurisdiction if a disagreement develops. Ensuring a choice of law clause is placed in your contract means there are no surprises down the line, and expectations are clear if all parties to the contract correctly negotiate and mutually agree on the governing law in the beginning.

Determining the Most Acceptable Governing Law and Jurisdiction

When choosing governing law and jurisdiction, consider:

• Where each party is located.

• Where assets are held if enforcement is needed.

• Where and how the contract will be performed.

• Whether disputes will go to arbitration or litigation.

Significance of the Language

The choice of law clause is frequently overlooked by dealmakers and their legal counsel. The provision may not have the desired effect if improper language is chosen. Those who work with contracts should ensure the phrasing is extensive and detailed in addition to carefully selecting the governing state.

Choice of law clauses has a standard form, even though the terminology used varies from industry to industry.

Writing contracts necessitate a thorough knowledge of how courts interpret choice-of-law clauses in various states. It’s a poor decision to use boilerplate language that may or may not be understood in the same way across the board. Other forms of claims that may occur within the relationship between the parties can be covered by a modified version of the standard language.

Restrictions to Using a Choice of Law Clause

Occasionally, the terms of a choice of law clause will collide with state or federal regulations. These differences, however, are rarely problematic during discussions.

• Choice of law clauses in insurance contracts is illegal in several states. State governments in the U.S., such as Massachusetts, care about enforcing their own consumer protection legislation.

• Certain sections in choice of law clause in cross-border contracts, such as those concerning secured transactions and/or the Uniform Commercial Code (UCC), may conflict with a choice of law clause at times.

• Contracts governing corporate activity are frequently subject to the laws of the state in which the organization is incorporated.

What Occurs if Governing Laws Are Not Identified in a Contract?

In situations where a dispute rises around a contract that is void a governing law provision, it usually results in a lengthy and expensive litigation to determine the governing law and court.

If there is a commercial dispute, the absence of governing law terms and jurisdiction clauses creates significant uncertainty. The possibility of successful completion of a contractual claim is likewise reduced in the absence of governing law.

For the most part, the choice of law clause in cross-border contracts that will govern a contract and which country’s courts will have jurisdiction can be chosen by the parties at the beginning of their commercial relationship. However, the ability to select a suitable governing law and jurisdiction must be carefully considered.

Seek Knowledgeable Legal Counsel

Should you need to devise, interpret, or dispute a contract containing a choice of law clause, seeking knowledgeable legal counsel is the first and most important step. Every company’s needs are unique and should be reflected in a custom contract to protect not only their current needs, but their anticipated needs.

The legal team at Boyer Law Firm stands ready to handle your contract needs. Our attorneys have in-depth experience in interstate and international agreements. Call us today to discuss what your company needs.