Don’t Leave the Law Governing Your Contracts to Chance
This post is the fourth in our series on navigating the landscape of US commercial contracts for international businesses. Here, we discuss the significance of choice of law clauses in contracts between foreign companies and US counterparties.
When a dispute arises in a US court, the governing law determines the parties’ rights, obligations, and exposure. If the contract does not specify that law, courts apply their own conflict‑of‑laws tests—which vary across states—leading to uncertainty, motion practice, and higher litigation costs.
A choice of law clause, also known as a governing law clause, allows the parties to declare which jurisdiction’s laws will govern the agreement and related disputes. These clauses are typically negotiated alongside forum selection clauses (which designate where a lawsuit must be filed) and arbitration clauses (which can keep a dispute out of the courts)—we’ll discuss both of these in subsequent posts.
For multinational companies, a choice of law clause can prevent costly battles over which law should apply, create uniformity across a company’s contract portfolio, and ensure all disputes related to a particular business relationship are resolved under a single, familiar set of rules.
Common Pitfalls to Avoid
Choice of law clauses are not one‑size‑fits‑all. Careful drafting is critical to cover the desired conduct and to assess how the clause interacts with the potential forum of the dispute:
Enforcement varies by state: US courts vary in their approach to enforcing governing law clauses. While many states honor the parties’ choice when the selected law bears a substantial relationship to the transaction, others apply different tests. Kentucky ignores choice of law clauses entirely,[1] and every state instructs courts to disregard choice of law clauses in certain types of contracts. For example, in New York, governing law clauses in construction contracts are “void and unenforceable” if the parties did not select New York law.[2]
What is covered depends on drafting: A narrowly drafted clause may only apply to breach of contract claims, leaving related tort, fraud, or statutory claims to be governed by a different, court-selected law. The same is true temporally: unless the clause is drafted to cover the parties’ conduct during pre-contractual negotiations, different laws could govern different parts of the relationship.
Procedure vs. substance: A choice of law clause governs substantive rights (the rights and obligations of the parties), but US courts always apply their own procedural rules. This distinction becomes crucial for issues like statutes of limitations, which some states classify as substantive and others categorize as procedural, directly impacting whether a claim can even be brought.
How to Select the Right Law
Which law to choose requires careful strategic considerations. Non-US companies considering entering into complex contractual arrangements should focus on three key factors:
Choose a system well-developed for commercial matters. New York or Delaware are common choices, as their well-developed case law provides stability and a predictable framework for resolving disputes.
Consider how the law will affect contract performance, interpretation, and liability. Different laws can lead to different outcomes, even in jurisdictions like New York and Delaware with well-developed case law on contracts. For example, New York law prohibits a party from limiting its liability for its own gross negligence, but Delaware law does not have such a blanket prohibition.[3]
Confirm the clause will be enforceable. Courts require some connection between the chosen law and the parties or the transaction. An unenforceable clause may create a false sense of security, leaving the parties exposed to the very uncertainty they sought to eliminate.
A well‑drafted choice‑of‑law clause is a cost‑effective way to reduce legal risk, increase predictability, and ensure your contracts operate as intended. But a standard clause may not work in every circumstance; indeed, the nuances in enforcement make it worthwhile to work with experienced counsel to design a clause that will support your business objectives and withstand judicial scrutiny.
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For a collection of related previous posts and webinars, please click this link. Additional posts in this series on US commercial contracts for international businesses include:
Common Pitfalls in US Commercial Contracts: How to Limit Unnecessary (and Costly!) Legal Exposure
Don’t Get Lost in Translation: Six US Contract Law Principles Non-US Companies Should Know
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[1] Schnuerle v. Insight Commc’ns Co., 376 S.W.3d 561 (Ky. 2012).
[2] N.Y. Gen. Bus. Law § 757(1) (McKinney 2025).
[3] CompareAbacus Fed. Savs. Bank v. ADT Sec. Serv., Inc., 967 N.E.2d 666, 682–83 (N.Y. 2012), with eCommerce Indus., Inc. v. MWA Intel., Inc., C.A. No. 7471–VCP, 2013 WL 5621678, at *45–46 (Del. Ch. Sep. 30, 2013).
