Jurisdiction and Governing Law: Why This Clause Can Make or Break a Contract

Presented by Amindus Consulting and Solutions

Contracts are the backbone of many business and personal agreements. They set out the rights and obligations of the parties involved. Among the many clauses in a contract, the Jurisdiction and Governing Law clause plays a critical role in determining how disputes will be handled if they arise. This clause specifies which legal system applies to the contract and where any legal disputes will be resolved.

Understanding this clause is essential for anyone entering into a contract. Overlooking it or drafting it poorly can lead to costly and complicated legal battles. This post explores why this clause matters, what can happen if it is ignored, and how to draft it effectively to protect your interests.

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What Does the Jurisdiction and Governing Law Clause Do?

The Jurisdiction part of the clause determines which court or legal authority will hear disputes related to the contract. The Governing Law part specifies which country's or state's laws will apply when interpreting the contract.

• Jurisdiction answers the question: Where will disputes be resolved?

• Governing Law answers the question: Which laws will be used to interpret the contract?

  
  

These two elements work together to provide clarity and predictability. Without them, parties may face uncertainty about where and how disputes will be settled.

Why This Clause Matters

Contracts often involve parties from different regions or countries. Without a clear jurisdiction and governing law clause, disagreements can lead to:

• Conflicts over which court has authority

• Uncertainty about which laws apply

• Increased legal costs and delays

• Risk of unfavorable laws or courts

For example, if a company in New York signs a contract with a supplier in California but the contract does not specify jurisdiction or governing law, a dispute could lead to confusion. The New York company might want to resolve the issue in New York courts under New York law, while the supplier might prefer California courts and laws. This disagreement can cause delays and extra expenses.

Examples of Consequences When This Clause Is Overlooked or Poorly Drafted

Example 1: International Business Dispute

A European company and a U.S. company enter into a contract without specifying governing law or jurisdiction. When a dispute arises, the European company files a lawsuit in its home country, while the U.S. company argues the case should be heard in the United States. This disagreement leads to:

• Lengthy jurisdictional battles

• Conflicting legal standards

• Increased legal fees

• Delayed resolution

The absence of a clear clause caused confusion and wasted resources.

Example 2: Ambiguous Clause Leads to Unfavorable Outcome

A contract states that disputes will be resolved "in the courts of the state where the seller is located," but does not specify which state's laws apply. When a dispute arises, the buyer sues in the seller's state, but the court applies the buyer's state law because the governing law was not clearly defined. This leads to an unexpected ruling against the seller.

This example shows how vague wording can cause courts to interpret the contract in ways that harm one party.

Example 3: No Clause Leads to Forum Shopping

Without a jurisdiction clause, parties may try to file lawsuits in courts they believe will be more favorable to them. This practice, known as forum shopping, can:

• Increase legal costs

• Create unfair advantages

• Prolong disputes

A clear clause prevents forum shopping by agreeing in advance where disputes will be resolved.

Best Practices for Drafting Jurisdiction and Governing Law Clauses

To protect your interests, consider these tips when drafting this clause:

Be Specific About Jurisdiction

• Name the exact court or courts that will have authority

• Decide if disputes will be resolved in state, federal, or international courts

• Consider whether arbitration or mediation will be used instead of courts

Clearly State the Governing Law

• Specify the exact jurisdiction’s laws that will apply (e.g., "the laws of the State of New York")

• Avoid vague terms like "applicable law" without further detail

Consider the Location of Parties and Business Operations

• Choose a jurisdiction familiar to both parties

• Consider convenience and cost of resolving disputes in that location

Address Alternative Dispute Resolution

• Include clauses for arbitration or mediation if preferred

• Specify rules and location for arbitration if chosen

Use Plain Language

• Avoid legal jargon that may confuse parties

• Make the clause easy to understand to reduce future disputes about interpretation

Review and Update Regularly

• Laws and business circumstances change

• Review contracts periodically to ensure the clause remains appropriate

How This Clause Protects Parties’ Interests

A well-drafted jurisdiction and governing law clause:

• Provides certainty about where and how disputes will be resolved

• Reduces legal costs by avoiding jurisdictional battles

• Helps parties plan for potential legal risks

• Prevents unfair surprises by agreeing on applicable laws in advance

• Supports smoother business relationships by minimizing conflict