Governing Law Provisions: Four Trends in Contract Drafting

Jan 04, 2023

"Let's talk about governing law provisions.

The parties to a contract are allowed to select the law that governs their agreement (with some exceptions and limits).

In the U.S., we usually see contracts governed by New York, Delaware, and California law. But exactly what percentage of each we haven't really known for sure.

Until now. Take a look at the graphs above.

Here's what I noticed:

1. Almost every contract (99%) has a governing law provision.

Bravo to all the contract drafters out there!!!

I'm a firm believer that governing law is one of the only must-have-no-matter-what provisions in any contract. We can figure out a lot of things IF we have the governing law. Otherwise, we'll have to first sort through huge conflicts of law mess before we even get to the contract issues.

I'm glad to see the market data shows people include these provisions, but I am a bit worried about those one-percenters who are not. (If that's you, add governing law to your contracts!!!)

2. New York is NOT the most common starting governing law in the parties' starting templates, but it IS the most common in the final agreements.

New York has long been the easy compromise choice when both parties start with different governing law preferences.

That said, everyone should understand the limits of New York's rules for selecting its laws to govern a contract when the parties and the transaction do not have sufficient contact with New York. There are some limitations. I encourage you to read up so you don't find yourself in the awful situation of having selected New York law in a contract for which it is not allowed under New York law.

3. California law dominates as the most common governing law in vendors' starting forms.

This data point makes sense. We're talking IT contracts here and a lot of the vendors' have a heavy presence in California. In my experience, most California companies try to stay in California courts for choice of venue and prefer to keep the governing law aligned with that.

4. Non-U.S. laws made a strong showing at 7% of the final forms, more than the percentages for the other 46 states, which mostly had 1% to 4%.

I was surprised by the relatively high number of contracts with governing law outside the U.S."

*This blog post uses data from TermScout's database of 1,000+ IT contracts. It is based on Laura Frederick's LinkedIn post.

**All the How to Contract paid members get access to a free annual TermScout plan, valued at $1,200 per year.


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