Governing law and jurisdiction clauses explained

What is a governing law clause?

A governing law clause, also called a choice of law clause, says which legal system will be used to interpret the contract and decide each side’s rights under it. If you’re asking which law applies to your contract, this is where the answer should be. It usually sits near the end, beside a jurisdiction clause, which says which courts will hear a dispute. A typical pair in a contract under England and Wales law looks like this:

What’s the difference between governing law and jurisdiction?

Governing law decides which rules apply to the contract, such as the law of England and Wales or New York law; jurisdiction decides which courts apply them. The place where a dispute is heard is called the forum, and in the US a jurisdiction clause is often called a forum selection clause. They are separate choices: a contract can make one without the other, or pair one country’s law with another country’s courts.

Courts can apply another country’s law, but it often means paying for expert evidence on what that law says, which adds time and cost. That’s why most contracts take the law and the courts from the same place, and why a mismatch is worth a question.

Why a far-away forum matters for a small business

A far-away forum matters because the cost of bringing or defending a claim somewhere else can be larger than the claim itself. You would usually need lawyers qualified there, often alongside your own, and you may have to travel for hearings run under an unfamiliar procedure.

For a small supplier, the dispute is often simple: the customer doesn’t pay. If recovering an unpaid invoice means instructing a lawyer in New York or Munich, a modest debt may not be worth chasing, and the other side knows it. So a clause often dismissed as boilerplate (standard wording that rarely gets negotiated) shifts bargaining power in every later disagreement, not just in court. Our guide to payment terms covers how to make late payment less likely in the first place.

What does exclusive jurisdiction mean?

Exclusive jurisdiction means disputes can be brought only in the courts named in the contract. Non-exclusive jurisdiction means both sides accept the named courts, but either may also be able to sue elsewhere, for example where the other party is based or holds assets. Exclusive clauses give certainty; non-exclusive ones give flexibility. Neither is automatically better. The red flag is a clause that is exclusive for one side and open for the other:

Exclusivity can also matter for enforcement across borders. The UK is a party to the 2005 Hague Choice of Court Convention, which supports exclusive jurisdiction clauses between the countries that have joined it. Whether it helps in a particular deal depends on the countries involved and the wording, so it’s worth checking with a lawyer if you expect to enforce a judgment abroad.

What is an arbitration clause?

An arbitration clause means disputes are decided by one or more private arbitrators instead of a court. Their decision, called an award, is usually final and binding, with much less scope for appeal than a court judgment. The clause normally names a set of arbitration rules, the number of arbitrators and the seat: the arbitration’s legal home, which decides which country’s courts can supervise it.

Here is how the two routes usually compare:

Arbitration can be quicker and more flexible than court, but because the parties pay the arbitrators, it can cost more for smaller disputes.

Which UK law? England and Wales, Scotland and Northern Ireland

There is no single “UK law” of contract, because the UK has three legal systems. England and Wales share one; Scotland has its own legal system, distinct from that of England and Wales; and Northern Ireland has its own courts. A clearly drafted clause names one of them, such as “the law of England and Wales” (often shortened to English law), “Scots law” or “the law of Northern Ireland”, with the matching courts.

A clause that says only “the laws of the United Kingdom” or “British law” leaves room for argument about which system was meant. The choice of system also affects who can advise you: lawyers usually advise on the system they’re qualified in, so a Scottish business that agrees to English law and courts may need a lawyer qualified in England and Wales if a dispute arises.

What happens if the contract doesn’t say which law applies?

If a contract names no governing law or courts, the court asked to hear a dispute uses its own rules to decide which law applies and whether it can hear the case. The answer depends on facts such as where each party is based and where the work is done, so it can be hard to predict, and arguing about it adds cost before anyone reaches the real dispute.

In the EU, for example, the Rome I Regulation sets default rules for contracts that don’t choose a law. For a contract for services, the starting point is generally the law of the country where the service provider is habitually resident (broadly, where it is based). Clues in the document, such as the parties’ addresses, the currency or a reference to a UK statute like the Late Payment of Commercial Debts (Interest) Act 1998, may point one way, but on their own they don’t settle the question.

Cross-border contracts: UK, EU and US

In a cross-border contract, each side usually wants its own law and courts, so the clause often reflects who drafted first. The rules on choosing law and courts differ between the UK, the EU and the US:

Between the UK and the EU, Brexit changed the picture: the EU regulations no longer apply to the UK in the same way, and cross-border enforcement of court judgments now depends on other arrangements. If the amounts are significant, the choice of courts deserves a lawyer’s view.

Between the UK and the US, where neither side will accept the other’s home courts, common middle grounds are a neutral forum, non-exclusive jurisdiction, or arbitration with a seat both sides can reach. Enforcing a court judgment in the other country can mean further proceedings there, which is one reason international contracts often choose arbitration instead.

US contracts: state law, jury trial waivers and class action waivers

In the US, contract law is mainly state law, so a US contract normally chooses the law of a particular state; “the laws of the United States” may not settle the question. Courts generally honour the choice if the state has a reasonable connection to the parties or the deal. Delaware law and New York law are popular choices, especially in the terms of large US companies. New York law also allows parties to choose New York law for larger contracts even without a connection to the state.

Two waivers often appear in US contracts that are less familiar to UK and EU businesses:

• Jury trial waiver. Many US civil cases can be decided by a jury. In a jury trial waiver, both sides give up that right, so a judge decides instead. It’s often printed in capital letters, and the rules on enforcing it vary from state to state.
• Class action waiver. Often part of an arbitration clause, it means each party can bring claims only on its own behalf, not as part of a class action with others in the same position. For a small business, that can make a modest claim uneconomic to pursue.

What to ask for in a governing law clause

The simplest request is for the law and courts of the place where you’re based, applying equally to both sides. Large organisations often have a fixed position here, so it helps to know your fallback options before you ask:

• Is one legal system named precisely? “The law of England and Wales” or “the laws of the State of New York”, not “UK law” or “US law”.
• Do the law and the courts match? If not, ask why.
• Does the clause bind both sides equally? If only you are tied to one court, ask for it to be mutual.
• Could you realistically bring a claim there? Picture an unpaid invoice: who would you instruct, and would it be worth it?
• Is any arbitration proportionate? Ask about a single arbitrator, a seat you can reach, video hearings and who pays the fees.
• Are there waivers you don’t understand? Jury trial and class action waivers deserve a US attorney’s explanation.
• Do other documents choose a different law? Order forms, statements of work and online terms sometimes do, so check which document wins in a conflict.

Because the forum affects what any claim is really worth, read this clause alongside the limitation of liability clause and the other contract red flags to check before you sign. To get quick, focused advice on your options, see how to brief a lawyer on a contract.

How LegalSling helps

LegalSling takes the governing law from the contract’s own wording and shows you the quote. If the contract doesn’t say, it tells you so. It may list clues it finds in the document, but only as clues: it never guesses. It explains jurisdiction and arbitration clauses in plain English and can flag markedly one-sided terms, such as a forum that binds only you, highlighting the exact words. It’s built for contracts under the law of England and Wales, Scotland, Northern Ireland, EU member states and US states, and it turns the flags, your notes and suggested questions into a brief for your lawyer. It explains; it doesn’t tell you whether to sign. See how it works.