What is Choice of Law / Governing Law Clause?

What it is

A choice of law clause specifies which state's or country's legal framework governs the interpretation and enforcement of the contract. This has enormous practical impact because the same clause can be enforceable in one state and void in another.

Why it matters in your deal

For self-funded buyers, commercial tenants, and franchise candidates, choice of law / governing law clause matters because it can change economics, leverage, closing certainty, post-close exposure, or the attorney questions that need to be answered before capital is committed. Risk signal: High. Can determine whether a clause is enforceable against you.

Real example

For example, if an APA specifies Delaware law but the target operates in California, the buyer needs to verify whether Delaware's business-friendly statutes or California's stronger employee protections apply to inherited employment agreements.

Red flags to watch

• •Watch for choice of law provisions that select a jurisdiction with weaker employee protections, weaker consumer rights, or shorter filing deadlines than the state where you actually live and work.
• •One-sided language that gives the other party discretion while limiting your consent, notice, cure, or remedy rights.
• •Undefined dollar caps, timing rules, notice methods, survival periods, territory, or trigger conditions.
• •Cross-references that move the real obligation into an exhibit, schedule, FDD item, lease addendum, or outside policy.
• •Terms that conflict with the self-funded buyers, commercial tenants, and franchise candidates diligence plan, financing assumptions, operating model, or counsel review checklist.

What to do

1. 1Quote the operative choice of law / governing law clause language and send the full surrounding section to counsel.
2. 2Tie the clause to economics, timing, remedies, assignment rights, consent requirements, and any closing condition it affects.
3. 3Ask for revisions that replace discretion with objective standards, defined notice periods, measurable caps, and clear cure rights.
4. 4Confirm the governing law, jurisdiction, and document cross-references before relying on the clause in negotiation.

Sources

1. Cornell Legal Information Institute - contract
2. Cornell Legal Information Institute - breach of contract