What is a Choice of Law Clause?

A Choice of Law clause (also referred to as The Governing Law clause) is a provision in a contract that specifies which laws will govern in the event of a dispute between the contracting parties. A Choice of Law clause allows the parties to pick the laws of jurisdiction that will govern the interpretation and enforcement of the terms of the contract.

The jurisdiction chosen for a Choice of Law clause does not need to match the jurisdiction chosen in a Forum Selection Clause. For example, the parties may stipulate to have California as the forum but agree that Delaware substantive law will apply. In that circumstance, California procedural law will apply.  The parties can even choose different jurisdictions for different types of disputes.

In the absence of a Choice of Law clause a court will use long established legal principals or, more likely, a state’s “long arm statute” to determine what law to apply, typically looking in commercial disputes to where the defendant “resides.”  In many cases a business resides where its principal place of business is located. Similarly, a partnership will reside in the state where any one of the partners reside.  However, another way to determine residence is the state where the business entity was formed.

Even if there is a Choice of Law clause, it may not be honored. For example, one party may contest the clause, arguing that the whole contract is invalid, making that specific provision invalid as well.  A court may also ignore a Choice of Law clause if it is dealing with a contract involving the Uniform Commercial Code (UCC) or secured transactions and there is a conflict with choice of law rules.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you with any business dispute or related concerns you may have.

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