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What is the Impact of the Governing Law Clause in a Commercial Contract?

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Often unnoticed in commercial contracts, a governing law clause significantly influences agreements, especially within New Zealand’s robust trade sector. Given the country’s substantial commitments to imports and exports, these clauses hold immense value. This article will discuss what a governing law clause entails and its impact on commercial contracts.

What is a Governing Law Clause?

The governing law clause guides the interpretation and application of the contractual terms and conditions. The clause typically lies near the final sections of a commercial contract, which constitutes of three fundamental elements which include:

  1. choice of law;
  2. choice of jurisdiction; and
  3. dispute resolution processes.

An example of a governing law clause may look something like this:

  • ‘This Agreement shall be governed, construed and enforced per the laws of (chosen country).’

1. Impact of Governing Law Clause on Choice of Law

This first element of a governing law clause gives parties the authority to choose the law that governs their contractual agreement. This decision dictates the interpretation and application of contract terms. For example, if both parties choose New Zealand law, those New Zealand legal principles may influence the rights and obligations.

However, it is essential to note that certain laws, such as the New Zealand Consumers Guarantees Act, may still apply regardless of the chosen governing law.

2. Impact of Governing Law Clause on Choice of Jurisdiction

This second element differs from the first in that it determines the courts or tribunals who have the power to resolve disputes that arise from your contract. The type of jurisdiction chosen under the governing law clause can either be:

  1. exclusive, which indicates that the contract will be confined to specific courts; or
  2. non-exclusive, which indicates a preference without restrictions.

The choice of jurisdiction is entirely up to the contracting parties’ discretion. For example, you may choose to apply the most beneficial jurisdiction to govern the contract. Usually, it is up to the geographical locations of the parties involved, assets governed by the contract and location of crucial transactions within New Zealand.

3. Impact of Governing Law Clause on Dispute Resolution Processes

Settling dispute processes are usually outlined in specific governing law clauses. These could include negotiation, mediation, or arbitration, specifying details such as meeting protocols, timing, and language usage. These processes align with the chosen law and jurisdiction, thus impacting dispute resolution.

How Should I Navigate International Jurisdictions?

When dealing with contracts governed by foreign laws, especially under an exclusive jurisdiction clause, specific considerations arise:

  1. the difficulty and cost of enforcing your rights in a foreign jurisdiction;
  2. the potential need to engage a foreign lawyer; and
  3. language barriers and the possibility of travelling to that jurisdiction.

Negotiating the choice of jurisdiction can take time and effort, especially against a more influential contracting party. If unable to sway the governing law clause in your favour, you should deeply understand your rights and duties in the contract. Further,  you maintain open communication to prevent disputes from escalating.

Furthermore, “neutral jurisdictions” may arise where they are often proposed in negotiations with powerful overseas counterparts as an alternative when agreeing on a chosen jurisdiction fails. For example, parties may use Singapore as the neutral jurisdiction as they use a common law legal system that aligns with the parties where neither party is predominantly based.  However, this choice poses risks stemming from foreign jurisdictions.

Overall, you should consider:

  1. assessing the governing law, jurisdiction, and contract enforceability aligned with your business preferences;
  2. prioritising negotiability within the contract’s nature;
  3. evaluating the suitability of New Zealand’s laws to govern the contract;
  4. weighing the advantages of resolving disputes in New Zealand courts;
  5. assessing whether arbitration might prove more beneficial than litigation in case of a dispute;
  6. analysing the other party’s location, assets, and their implications on enforcement; and
  7. factoring in enforcement costs.

Due to the complexities of this clause, it is a good idea to seek legal advice to ensure all parts of the clause are in your best interests.

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Key Takeaways

Though seemingly a modest clause, the governing law clause holds substantial significance. It shapes contract interpretation, dispute resolutions, and how rights and obligations are protected. Aligning this clause with New Zealand business operations can offer you a strategic advantage, and understanding its intricacies is crucial for informed and effective contractual agreements.

If you need assistance drafting or reviewing your governing law clause, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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