If you have ever successfully read an entire contract without falling asleep, you may have noticed a two or three line section near the end of the agreement entitled “Applicable Law”. This provision is found in long, detailed contracts, as well as most (relatively) short, boilerplate agreements. So, what is important about this provision anyway?
This seemingly straight-forward provision can actually affect three related, but distinct issues:
1. Governing law,
2. Forum selection, and
And, to make matters even more complicated, the legal principles that govern these choices are not the same (at least, not here in California)! Let’s explore this provision in a bit more detail…
These days it is not unusual for disputes to involve parties in two or more different jurisdictions. When that happens, and the parties ends up in court, the judge must determine which law to apply to resolve the situation. Since state laws can vary significantly, the outcome of a case can depend on which state’s laws are applied to the dispute.
If the contract does not have a provision stating which state’s law will apply, a court will use conflicts of law principles to determine which law should be used. These conflicts of law principles vary from one state to another.
To create a greater level of certainty and to avoid additional conflicts, parties can specify in their contract which state’s law they want to govern their contractual relationship. For even further certainty, parties can specify that a given state’s law will apply, regardless of that state’s conflicts of law principles. This eliminates the opportunity for a party to use the selected state’s conflicts of law principles to argue that a different state’s laws should actually apply!
Governing law provisions are presumptively enforceable as long as there is some relationship between the transaction and the jurisdiction selected to govern, or some other reasonable basis for choosing the law from that particular jurisdiction. There are a couple of exceptions to this ability to “choose your own law” to keep in mind however. Public policy reasons against enforcement will trump private choice of law provisions, and also there are also specific statutory choice of law rules that cannot be modified by contract.
The best way to maximize the chances that your Governing Law provision is valid and enforceable is by hiring an experienced and knowledgeable attorney to help you draft your agreement! Contact the Law Offices of Darius T. Chan, P.C. if you have specific legal questions you would like to discuss.
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