James Madison remarked that “if men were angels, no government would be necessary.” Madison’s statement—antiquated gendering aside—applies not only to governance of countries, but also to governance of contracts. If there is never a dispute, the governing law clause is never invoked. Disputes do indeed happen, and governing law determines how they get resolved.
Despite their centrality, governing law clauses get overlooked. Many startup founders assume that the probability of litigation is near zero. They also assume that laws are pretty similar everywhere and governing law is chosen mainly based on where a party is located. Legal boilerplate, even if important, often plays second fiddle to the Four Ps: product, price, placement, and promotion.
Overlooking governing law can come back to bite. First, laws differ tremendously from one jurisdiction to the next. What constitutes libel in the U.K. is quite a bit different than in the U.S. Texas courts are generally more likely to enforce non-compete clauses than California courts. What is considered “reasonable efforts” is often governed by local case law more than people realize.
Second, the governing law clause often embeds forum selection, either implicitly or explicitly.
This is particularly true in shorter documents like NDAs. What gets written there affects not just which laws apply, but where they’re applied. A startup that signs onto a partner’s terms may be litigating on the partner’s home turf and have to retain local counsel to do so. For companies with limited resources and procedural familiarity, this can be a major disadvantage.
Third, and relatedly, local law affects more than just substantive doctrine. It can affect deadlines, evidentiary standards, and other procedural matters. Some courts (e.g., in India) allow ex parte hearings for injunctive relief. Most U.S. jurisdictions have tight response deadlines. Some courts allow extensive discovery, while others strictly limit the materials deemed admissible or relevant. While a full accounting is not possible here, suffice it to say that choosing the wrong governing law can put a party at a severe disadvantage, even if they are substantively in the right.
The follow-up question is what can be done about this? A few pointers:
- Understand Negotiability. While you can’t negotiate every NDA—and may be required to sign up to unilateral NDAs in some cases—most B2B agreements are negotiable. Even if a partner sends you a PDF or packet for e-signature, you can request a Word version to redline. Take advantage of this opportunity and check the governing law. It is often possible to change the governing law to a neutral or mutually familiar jurisdiction with a simple request.
- Employ Leverage. If you are signing a contract, chances are that there is a commercial logic to the other side engaging with you. Use this leverage to ask for flexibility on governing law and dispute resolution. It usually makes sense to stake out your preferred governing law and then suggest a neutral compromise. For example, if your company is based in Texas, but a partner is in California, you can propose Texas and then leave Delaware as a fallback, particularly if either or both of you are incorporated there.
- Engage Counsel Proactively. You don’t need to preemptively sign engagement letters for future disputes. After taking inventory of the governing law provisions in your contracts, you will have a clearer sense of where the risk factors lie. Having relationships with local lawyers allows you to better manage deadlines and evidence and more realistically assess a case when it does arise. Even if your local counsel does not practice in the same area as your dispute, they can often be extremely helpful in pointing you in the right direction.
In sum, governing law is elemental to a contract. In a word, it governs it. Choose wisely, and don’t overlook it as mere boilerplate.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.