Examining a Recommended Governing-Law Provision

An article in Corporate Counsel by a BigLaw partner and associate (copy here) considers governing-law provisions. It suggests that using the following provision would increase the odds of a court’s holding that the provision applies to claims other than claims under the contract:

This contract shall be governed and construed in accordance with the laws of [selected State], excluding that State’s choice-of-law principles, and all claims relating to or arising out of this contract, or the breach thereof, whether sounding in contract, tort or otherwise, shall likewise be governed by the laws of [selected State], excluding that State’s choice-of-law principles.

Some features of this proposed language caught my eye:

  • This is language of policy, not language of obligation imposing an obligation on the subject of the sentence, so using shall is unhelpful.
  • Why “governed and “construed”? Yes, I’m aware of commentary offering a distinction, but it’s just so much sophistry.
  • “Sounding in” is a pompous and fusty alternative to “actionable in.”
  • Why say that both the contract and any claims are governed by the law in question? Governing law is relevant only when the parties disagree about some aspect of the contract.
  • Why refer to claims arising “out of this contract” as well claims arising out of “breach thereof”?

So this provision seems cobbled together using a motley assortment of parts.

But there’s broader conceptual issue lurking in there, namely how the recommended provision attempts to ensure that it covers extra-contractual claims.

First, it refers to “claims relating to or arising out of” rather than just “claims arising out of.” And second, it covers all claims, “whether sounding in contract, tort or otherwise.”

I have a different approach. Here’s the governing-law provision from a contract created using the Koncision confidentiality-agreement template:

The laws of the state of New York, without giving effect to its principles of conflicts of law, govern all adversarial proceedings brought by Acme against Widgetco arising out of this agreement or arising out of disclosure or use of Confidential Information.

As explained in MSCD 13.18 and in my article on the sorry AAA standard arbitration clause (here), using arising out of or relating to is too oblique a way to express that a provision covers extra-contractual claims. So the Koncision language doesn’t use arising out of or relating to.

Furthermore, instead of stating claims narrowly by linking them only to the contract, then using “whether sounding in contract, tort or otherwise,” or something comparable, to encompass extra-contractual claims, the Koncision language refers to both the contract and the subject matter of the contract, in this case disclosure or use of confidential information. So if anything falling within the subject matter of the contract gives rise to a claim, it will fall within the scope of the governing-law provision. You can’t get broader than that.

And as the following extract from my article on the AAA standard arbitration clause (linked to above) explains, tort claims aren’t the only possible extra-contractual claim:

Instead of following the proposed alternative approach, you could refer explicitly to claims that are covered—for example, by saying including any tort claims. But there’s no guarantee that the transactional lawyer drafting a given contract would have a firm grasp of not only the deal terms but also the kinds of claims that the client might want to bring in the event of some future dispute. But if you know that a particular kind of extra-contractual claim would be relevant for purposes of a given contract, supplementing the proposed alternative language by referring to that kind of extra-contractual claim might provide some belt-and-suspenders comfort.

In other words, if you also want to refer specifically to a kind of extra-contractual claim, go ahead. But I think my approach is simpler and less legalistic.

(By the way, even though referring to conflicts of law is unnecessary if a contract is governed by New York law (see this analysis by Shearman & Sterling), the Koncision provision includes that language. Sometimes it’s simplest to state the obvious.)

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

18 thoughts on “Examining a Recommended Governing-Law Provision”

  1. Ken: What are your thoughts on “splitting the contract” so that parties in different jurisdictions are subject to their respective laws rather than some arbitrary, “neutral” governing law? Is that an ideal compromise when you can’t get a party to agree to be subject to the laws of your own jurisdiction?

    • I’ve done this, but usually, I offer to split it to be mutually disinteresting. In other words, if *I* sue, I have to use YOUR choice of law (and sometimes jurisdiction) and vice versa?

  2. I wouldn’t use your language because I want my contracts to be construed in accordance with the chosen governing law BEFORE there’s an “adversarial proceeding”.

    • I share Jeffrey’s unease with this wording. In my view, choice of law clauses should be designed first to dovetail with State, national and regional laws on choice of law in contracts. From a quick look at the Rome I Regulation and a law firm’s note on choice of law in the US, the key issue is whether the parties have agreed a law that their contract is made under. I would prefer to state this point explicitly, and would be concerned about potential clever arguments that the wording above is limited to some aspects only, eg interpretation but not formation. Ultimately, I suspect such an argument would fail in front of a good judge (but what about the “addled” ones who make poor linguistic choices?)

      • The choice reflected in my version is pretty standard. For example, the language offered in “Negotiating and Drafting Contract Boilerplate” refers only to “matters arising out of and relating to” the contract.

        Governing law isn’t some abstract concept. It’s no accident that in “Negotiating and Drafting Contract Boilerplate” discussion of governing-law provisions falls under “Dispute Resolution Provisions.” My language kicks in if ever there’s a fight. That’s all that matters, until someone shows me otherwise, including by showing me that there’s non-trivial risk of an adverse outcome in litigation.

        But isn’t the burden on me to show that language is safe? Communication among humanoids can be messy, and I’m not in the business of providing guarantees. Instead, I aim for clarity plus a reasonable measure of risk avoidance. Sometimes judges just get stuff wrong, and if you try to protect against all instances of that, you’ll end up with deformed contract language. See https://www.adamsdrafting.com/the-illinois-appellate-courts-problematic-take/ and https://www.adamsdrafting.com/should-you-pander-to-confused-judges/.

        I suspect that the biggest obstacle to people adopting my language is aversion to change. Let’s stick with standard language, with all the risk and confusion it involves, rather than using clearer alternatives, because at least it’s the dysfunction you know.

        • Ken, I’m not sure I understand your point. I think we may be focussing on different things. According to para 6.04 of Stark (2003), she recommends:

          “The laws of … govern all matters arising out of or relating to this Agreement, including, without limitation, its [validity], interpretation, construction, performance, and enforcement.”

          The above wording addresses my concern.

          It seems to me that your wording provides an alternative to “arising out of or relating to this Agreement” but doesn’t capture the last part.

          • Yes, but the NDCB language is couched in terms of dispute resolution. The litany at the end is needless elaboration.

            I’m glad that Disqus now avoids the extreme squeezing of serial replies!

          • Needless elaboration? Perhaps, in front of a sensible judge. In front of an addled judge, perhaps not. It seems to me that, even if most of the contract should focus on clarity and avoiding dispute, and not on court shenanigans, there are some areas where the drafter should give more attention to the games people play in court. Choice of law and jurisdiction would come high up my list of those areas.

  3. Caveat: Familiarity breeds carelessness, and you should be careful what you wish for. Think through a few predictable scenarios to see whether all the things you want scooped up under your favorite jurisdiction’s law would work to your advantage. And don’t accept the counter-party’s choice of law without due diligence in how its quirks could disadvantage you.

    That said, here’s the most compact rendering I can think of to pile all aspects of what the parties do with and to each other under one jurisdiction’s law.

    “The domestic laws of […] govern (a) this agreement and the parties’ rights and duties under it; (b) all claims arising in relation to this agreement under any legal theory; and (c) the acts and omissions of the parties in the context of this agreement.”

    Note that “domestic law” carries the meaning of the exclusionary clause, but you can substitute the exclusionary words if you feel uneasy with a blunt statement like that.

  4. Anent “The laws of the state of New York, without giving effect to its principles of conflicts of law,” I was taught that the correct phrase is “conflict of laws,” not “conflicts of law,” on the ground that “the law doesn’t conflict, laws do.”

  5. Ken: The first clause you quote above reads “excluding that State’s choice-of-laws principles”? Shouldn’t it be “conflict-of-laws principles”? Aren’t you invoking the state’s choice-of-laws principles by virtue of choosing the state’s laws? Maybe choice-of-laws principles are the same as conflict-of-laws principles … ?


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