Meaning
Contractual provisions specify which jurisdiction’s statutes govern the interpretation and enforcement of an agreement. By designating a choice law, the parties minimize uncertainty regarding how their contract will be evaluated in a dispute. This clause determines the legal rules that apply to performance, breach, and liability limits.
Jurisdictional Clause
Drafting an effective governing provision requires selecting a state that has a reasonable relation to the parties or the transaction. For example, many corporations choose Delaware due to its well-developed corporate jurisprudence and predictable rulings. If the chosen jurisdiction has no connection to the business activities, a court may ignore the clause and apply local rules instead.
This selection affects every subsequent dispute, shaping the burden of proof and the availability of specific damages.
Enforcement Risk
Courts sometimes refuse to enforce the selected statutes if they violate the strong public policy of the forum state. Such refusals are common in employment cases involving non-compete agreements.
Default Rule
When an agreement lacks a clear governing provision, the court applies a multi-factor test to determine the center of gravity of the transaction. This analysis evaluates where the contract was negotiated, signed, and performed. Such calculations add significant delay and cost to the resolution of any dispute.
