Governing Law Clause

What is a governing law clause?

Every contract needs a body of law behind it. A governing law clause (also called a choice of law clause) picks that law in advance. If a dispute comes up, a court or arbitrator reads the contract through the rules of the state or country named in the clause.

In SaaS contracts, the vendor writes the clause, so it often picks its own home. HubSpot's terms say the agreement for US customers is "governed by the laws of the Commonwealth of Massachusetts." Zendesk's customer agreement picks California. Some vendors split by region. Atlassian's Customer Agreement uses Irish law for customers in Europe, the Middle East and Africa, and California law for everyone else.

The clause sits near the end of the master service agreement or terms of service, often next to the arbitration clause and the venue clause.

Why it matters to you

• Cost of a dispute. If the law is from a state where you have no lawyer, you pay for one who knows it. That raises the price of pushing back on a bad invoice or a breach.
• What the words mean. State laws differ. For example, New York's General Obligations Law 5-903 makes an automatic renewal clause in a contract for service, maintenance or repair of property unenforceable unless the provider sends a written reminder 15 to 30 days before your notice deadline. Whether it reaches a given software subscription depends on the facts. The same auto-renewal clause can play out differently under different law.
• It can change without a negotiation. When a vendor is bought, moves its headquarters or rewrites its terms, the new version can name a different company and a different law. If the terms allow unilateral changes, that shift can reach you at your next renewal.
• Your own customers. If you promise your customers certain rights, you want your vendor contracts read under law that lets you keep those promises.

What to check

• Which state or country is named, and whether it changes by your location. Some vendors pick the law based on where you are located.
• Which company is your contracting party. After an acquisition, check whether the entity and its law changed in the latest version.
• Whether the clause says the law applies "without regard to conflict of laws principles." That phrase is meant to keep a court from applying another state's law instead.
• Whether an arbitration clause or class action waiver sits on top of it. Those decide how a dispute runs, not just which law applies.
• On a negotiated contract, whether you can ask for your own state's law, or a neutral one such as New York or Delaware.

Venue and Jurisdiction

Governing law decides which rules apply. The venue and jurisdiction clause decides where the case is heard. "Jurisdiction" means a court's power to hear the case. "Venue" means the specific place, such as a county or city.

Vendors often name courts near their own office. HubSpot's terms give "exclusive jurisdiction and venue" to the courts of Boston, Massachusetts. Zendesk names a court in San Francisco County, California. Atlassian names the state and federal courts in San Francisco for customers outside Europe, the Middle East and Africa.

"Exclusive" is the word to watch. It means you cannot file anywhere else, so a dispute may require travel and local lawyers. If the contract also has an arbitration clause, the disputes it covers go to arbitration instead, and the named courts handle only what arbitration leaves out. On a negotiated deal, you can ask for courts in your own state or a neutral one.

How Venpo helps

Venpo watches your vendors' terms of service and other public legal pages and emails you when they change. If a new version names a different governing law, a different court or a different contracting company, the alert says what changed and why it matters to you.