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.