Governing Law
A governing law clause states which country’s or state’s law will be used to interpret the contract and decide any dispute about it.
What it does
Contract law differs between countries, and in some countries between states or regions. The same wording can be read differently, implied terms vary, and the rules on what can be excluded or limited are not the same everywhere. A governing law clause removes the uncertainty by naming the legal system that applies.
The clause is short and usually sits near the end of the contract with the jurisdiction clause. The two are separate. Governing law says which rules apply. Jurisdiction says which courts (or arbitrators) apply them. A contract can be governed by Swedish law and litigated in an English court, though that combination is expensive and best avoided.
Within the EU, courts generally respect the parties’ choice of law in a B2B contract. Certain mandatory local rules, such as some consumer, employment, and competition provisions, still apply regardless of the choice. Outside the EU, most developed legal systems also respect a choice of law in commercial contracts, but the details are jurisdiction-dependent.
Example wording
This Agreement, and any dispute or claim arising out of or in connection with it or its subject matter, shall be governed by and construed in accordance with the laws of [country], without regard to its conflict of law rules.
Risks for SMBs
Foreign law you cannot assess. An SMB signing a contract governed by the law of a country it has never operated in has no realistic way to know what the contract means. Terms like “consequential loss” or “reasonable endeavours” may mean something different there. Prefer your own law, and failing that, a law that lawyers you can afford are familiar with.
Law and courts in different places. Combining one country’s law with another country’s courts means the court applies foreign law, often requiring expert evidence about what that law is. For an SMB, that doubles the cost of any dispute. Align the two unless there is a specific reason not to.
Mandatory rules still bite. A choice of foreign law does not switch off local rules that protect a weaker party, regulate data, or set public policy. An SMB supplier serving customers in several countries should not assume its home law governs everything.
Silence. Without a governing law clause, the applicable law is decided by conflict of law rules, which are complex and may produce an unexpected answer. This is a clause that is worse to omit than to get slightly wrong.
“Laws of the United States” and similar. Some countries do not have a single national contract law. In the United States, contract law is state law, so the clause must name a state. A vague reference may be unenforceable.
Common variants and negotiation points
- Home law. Each side usually prefers its own law. The party with more bargaining power wins. A supplier serving many countries often insists on its home law for consistency, which is reasonable.
- Neutral third law. Where neither side will accept the other’s law, English or Swiss law are common neutral choices in international deals. This adds cost, since neither side’s usual lawyers may know it well.
- Exclude conflict of law rules. The phrase “without regard to its conflict of law rules” stops the chosen law’s own rules from pointing to a different legal system. Keep it.
- Non-contractual claims. Make the clause cover disputes “arising out of or in connection with” the contract, so that non-contractual claims such as negligence or misrepresentation are governed by the same law.
Related clauses
- Jurisdiction: which courts or arbitrators decide disputes.
- Entire agreement: how the chosen law treats pre-contract statements.
- Severability: what happens when the chosen law refuses to enforce a clause.
- Force majeure: a clause whose meaning depends heavily on the governing law.
This page is general information about a common contract clause. It is not legal advice and does not account for your jurisdiction, industry, or the specific contract in front of you. Talk to a qualified lawyer before relying on it.
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