A choice of law clause is a contract provision in which the parties agree, up front, which jurisdiction’s laws will govern their agreement. It tells any future court which state’s or country’s rules to use when interpreting the contract, deciding what counts as a breach, and determining what remedies are available. Without one, a court has to run its own analysis to figure out which laws apply, and the answer can surprise both sides.
Why Contracts Include One
When the parties sit in different states or countries, more than one body of law could plausibly govern the deal. A software company in one state contracting with a client in another raises an immediate question: whose contract law controls? Each state has its own rules about how to read ambiguous terms, what remedies are available for breach, and whether certain obligations are enforceable at all. Those answers can diverge sharply.
If the contract is silent, courts use a “conflict of laws” analysis to sort it out, weighing factors like where the contract was formed, where performance happens, and where the parties are located. That process is expensive, unpredictable, and often litigated heavily before anyone reaches the actual dispute. Naming the governing law in the contract skips all of it and lets both sides draft with a specific legal framework in mind rather than hedging against whatever rules a court might later select.
What a Working Clause Looks Like
A standard clause names a jurisdiction and declares its laws controlling. A common version reads: “This Agreement shall be governed by and construed in accordance with the laws of the State of New York.” That one sentence anchors every interpretive question about the contract to New York law.
Most well-drafted clauses add the phrase “without regard to its conflict of laws principles.” Every state has rules for deciding when to apply another state’s laws, and in theory a court could honor your choice of New York law, then apply New York’s conflict rules and conclude that California law should govern instead. The “without regard to” language shuts that door by directing the court to apply the chosen state’s substantive rules and nothing else. Some practitioners view it as unnecessary because courts rarely take that detour, but it costs nothing and closes an arguable loophole.
Choice of Law Is Not Forum Selection
These two clauses often sit next to each other in a contract and get confused constantly. They do different jobs. A choice of law clause picks which legal rules apply. A forum selection clause picks which courthouse hears the case. You can choose New York law and agree to litigate in Delaware, or the reverse. Most parties pick the same jurisdiction for both, but they don’t have to.
The distinction matters because a Delaware court applying New York law will use New York’s contract interpretation rules, New York’s remedies, and New York’s standards for enforceability, but Delaware’s procedural rules for how the trial actually runs, including filing deadlines, discovery, and evidence. Getting that relationship wrong produces surprises at exactly the wrong moment.
When Courts Will Enforce the Clause
Courts overwhelmingly respect choice of law clauses. The reasoning is that parties to a contract should be free to structure their deal, and predictability in commercial transactions benefits everyone. Enforcement is not automatic, though. The most widely used framework comes from the Restatement (Second) of Conflict of Laws, which most states have adopted in some form.
The Substantial Relationship Requirement
The chosen state must have a “substantial relationship” to the parties or the transaction, or there must be some other reasonable basis for the choice. Picking the law of a random state where neither party lives, works, or does business, and where the contract has no connection, invites a court to throw out the clause entirely. In practice, that means choosing a state where at least one party is headquartered, where performance will happen, or where the transaction is centered.
The Public Policy Exception
Even with a substantial relationship, a court can refuse to apply the chosen law if doing so would violate a fundamental public policy of the state that would otherwise govern. The bar is high. The objecting state must have a “materially greater interest” in the issue than the chosen state, and the conflict must be genuine rather than a difference in degree. A state with slightly different breach-of-contract rules won’t override your clause. A state with strong consumer protections that your chosen law lacks might.
This exception shows up most often in areas where legislatures have made deliberate policy calls: consumer protection, employment, insurance, and franchise relationships. If one state has decided that certain contract terms are unenforceable because they harm vulnerable parties, a clause pointing to a more permissive state won’t automatically override that protection.
What the Clause May Not Cover
A generic choice of law clause often does less than people assume. Two gaps come up repeatedly.
Non-Contract Claims
Courts are split on whether a clause saying the contract “shall be governed by” a particular state’s law extends to non-contractual claims like fraud, negligent misrepresentation, or statutory violations arising from the same deal. Some courts read the language narrowly and apply the chosen law only to claims sounding in contract, so a fraud claim connected to the same transaction can end up governed by a completely different state’s law. Other courts apply the chosen law to any dispute connected to the contract. There is no national consensus, and the answer depends on where the case is heard.
The fix is specificity. A clause stating that the chosen law governs “all claims or causes of action, whether in contract, tort, or statute, that arise out of or relate to this Agreement” leaves far less room for a court to carve out non-contract claims.
Statutes of Limitations
Many states treat filing deadlines as procedural rather than substantive for choice-of-law purposes. If you choose New York law but end up litigating in California, a California court might apply California’s statute of limitations even though New York law otherwise governs. If California gives you two years to sue and New York gives you six, your claim could expire before you realize the clock changed.
Some contracts address this by stating that the chosen state’s law governs “including its statutes of limitations,” which treats the deadline as part of the substantive law you selected rather than a procedural question for the forum court.
Where Party Choice Is Limited
Choice of law clauses between two businesses negotiating at arm’s length receive the most deference. When bargaining power is lopsided, scrutiny goes up. Courts evaluating these clauses in adhesion contracts, where terms are presented on a take-it-or-leave-it basis, examine them more heavily and may refuse to enforce them if the weaker party had no realistic ability to negotiate, especially when the chosen law offers less protection than the law where that party lives or works.
Employment contracts have become an active area. A growing number of states have passed laws restricting or voiding choice of law clauses in employment agreements, particularly those involving noncompetes. California, Colorado, Massachusetts, and Washington have all enacted legislation limiting an employer’s ability to select another state’s law when the employee lives or works in one of those states. Employers relying on a choice of law clause to apply a noncompete-friendly state’s law to a worker in a restrictive state may find the clause unenforceable regardless of what it says.
International Sales and the CISG
International sales of goods create a trap that catches experienced attorneys. The United Nations Convention on Contracts for the International Sale of Goods (the CISG) is a treaty the United States has ratified, making it federal law. When a U.S. company contracts to sell goods to a company in another CISG member country, the Convention applies automatically unless the parties explicitly exclude it.
Choosing a U.S. state’s law does not exclude the CISG. Because the Convention is federal law, it applies throughout the United States, and a clause selecting the laws of New York selects all applicable law in that jurisdiction, including the Convention. To actually opt out, the contract needs explicit language, such as a statement that the parties “expressly exclude the United Nations Convention on Contracts for the International Sale of Goods.” Article 6 of the CISG allows parties to exclude the Convention or modify its provisions, but the exclusion must be affirmative.1UNCITRAL. United Nations Convention on Contracts for the International Sale of Goods
UCC Transactions
For contracts involving the sale of goods within the United States, the Uniform Commercial Code sets its own rule. Under UCC Section 1-301, parties can agree to apply the law of any state so long as the transaction bears a “reasonable relation” to that state.2Legal Information Institute. UCC 1-301 Territorial Applicability; Parties’ Power to Choose Applicable Law The bar is lower than the Restatement’s substantial relationship test, but it still rules out picking a wholly unrelated state.
The UCC also carves out specific areas, including bank deposits, letters of credit, investment securities, and secured transactions, where mandatory choice of law rules override whatever the parties agreed to.2Legal Information Institute. UCC 1-301 Territorial Applicability; Parties’ Power to Choose Applicable Law If your deal touches secured financing or letters of credit, the choice of law clause in your main agreement may not control those pieces of the transaction.
Drafting Points That Matter
Most disputes about these clauses arise not because the clause was missing, but because it was too vague to do its job. A few principles make a measurable difference.
- Choose a jurisdiction with a real connection. Pick a state where at least one party is headquartered, where performance will happen, or where the transaction is centered. That satisfies both the Restatement and the UCC.
- Specify scope broadly. Add language covering all claims “whether in contract, tort, or statute” that arise out of or relate to the agreement, so a court is less likely to carve out fraud or misrepresentation claims.
- Include the statute of limitations. Adding “including its statutes of limitations” after the governing law prevents a forum court from substituting its own filing deadline.
- Address the CISG whenever an international sale of goods is involved. Either learn and accept its rules or exclude it by name. Silence defaults to inclusion.
- Keep the “without regard to conflict of laws” language. It is costless insurance against a court applying the chosen state’s conflict rules to send the dispute to another jurisdiction’s law.
Choice of law language is the kind of provision people fill in on autopilot, pulling wording from the last deal without checking whether it fits this one. The clause decides which legal system judges every obligation, every breach, and every remedy in the contract. Getting it right while drafting costs far less than fighting over it later.