Summary. Two short paragraphs near the end of most contracts decide which state's law governs the deal and which court hears the fight. They are drafted in minutes, negotiated rarely, and worth more than most of the substantive terms they sit behind, because the same facts produce different outcomes under different law and in different courtrooms. This article explains how each clause works and how courts actually treat them: the choice of law analysis under the Restatement (Second), the substantial relationship and fundamental policy limits, and the mandatory rules that override contract language; then forum selection, the difference between exclusive and permissive clauses, enforcement under Bremen and Carnival Cruise, and the procedural framework Atlantic Marine imposed. Sections on arbitration interaction, jury waivers, consent to jurisdiction and service, and internal affairs follow, with drafting language, a worked example, an FAQ, and related reading.

Two companies sign a distribution agreement. The substantive terms took six weeks. The last page took ninety seconds: "This Agreement shall be governed by the laws of the State of New York. The parties consent to jurisdiction in New York."

Three years later the distributor is terminated. Whether it has a claim depends on whether a state franchise relationship statute applies, whether the implied covenant of good faith constrains termination, whether consequential damages are recoverable, and whether a two-year contractual limitations period is enforceable. Every one of those answers differs between New York and the distributor's home state. And whether the case is heard in Manhattan or in the distributor's county seat will shape the cost, the jury pool, and the settlement value.

The ninety-second paragraph was worth more than the six weeks.

The short answer

Choice of law. Courts generally honor the parties' choice, subject to two widely applied limits drawn from Restatement (Second) of Conflict of Laws § 187: the chosen state must have a substantial relationship to the parties or the transaction (or there must be another reasonable basis for the choice), and applying the chosen law must not be contrary to a fundamental policy of a state with a materially greater interest that would supply the governing law absent the clause.

Forum selection. A clause designating a forum is presumptively enforceable in federal court and should be given "controlling weight in all but the most exceptional cases." M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972); Atlantic Marine Construction Co. v. U.S. District Court, 571 U.S. 49 (2013).

The mechanics matter. A clause pointing to another federal district is enforced by transfer under 28 U.S.C. § 1404(a). A clause pointing to a state or foreign court is enforced by forum non conveniens. It is not enforced by a Rule 12(b)(3) motion, because venue is "proper" if it satisfies § 1391 regardless of the clause.

They are different questions. A New York choice of law clause does not require a New York forum, and a Delaware forum does not import Delaware law. Draft both, deliberately, and make them consistent.

Part I: Choice of law

Why it matters more than clients think

The instinct is that contract law is roughly the same everywhere. It is not, and the differences cluster in exactly the provisions parties fight about:

  • Limitation of liability and consequential damages. Enforceability, the gross negligence exception, and whether an exclusion survives failure of essential purpose all vary. See Indemnification and Limitation of Liability.
  • Liquidated damages. The line between a permissible estimate and an unenforceable penalty differs materially.
  • Implied covenant of good faith and fair dealing. Some states use it aggressively to police termination and discretion; others confine it narrowly.
  • Non-competes. Enforceable, reformable ("blue penciled"), or void depending on the state. This is the single largest divergence in American contract law.
  • Contractual limitations periods. Enforceable in many states, restricted in others.
  • Indemnity for one's own negligence. Requires express language in some states, is void in construction contracts in many.
  • Attorney's fees. Some states make one-sided fee clauses reciprocal by statute.
  • Statutes of limitations and repose, and whether they are procedural (forum law) or substantive (chosen law).
  • Punitive damages availability and caps.

The federal court framework

A federal court sitting in diversity applies the forum state's choice of law rules. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941). That follows from Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938): federal courts apply state substantive law, and conflicts rules are substantive for this purpose.

The practical consequence is that the forum determines the choice of law rules, which determine the governing law. Forum shopping and law shopping are therefore linked, which is why sophisticated parties draft both clauses together.

Restatement § 187 in practice

Most states follow the Restatement (Second) approach, either by adoption or by convergence. Section 187 distinguishes two situations.

Issues the parties could have resolved by explicit agreement (most contract terms): the chosen law applies, essentially without limitation.

Issues the parties could not have resolved by explicit agreement (capacity, formalities, substantive validity, unconscionability, and anything governed by a mandatory rule): the chosen law applies unless:

  • (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the choice; or
  • (b) applying the chosen law would be contrary to a fundamental policy of a state that has a materially greater interest in the determination and whose law would apply under § 188 absent the clause.

"Substantial relationship" is usually easy to satisfy: a party's incorporation, principal place of business, or place of performance suffices. Delaware and New York get chosen constantly by parties with no other connection, and both are generally upheld — Delaware because of the internal affairs doctrine and its incorporation base, New York by statute for large commercial contracts (N.Y. Gen. Oblig. Law § 5-1401 permits parties to choose New York law for contracts covering at least $250,000 even without any New York contact, and § 5-1402 permits consent to New York jurisdiction for contracts of at least $1,000,000). Several other states have enacted analogous statutes.

"Fundamental policy" is the escape hatch, and it is narrower than litigants hope. It is not merely a different rule; it must be a policy of substantial public importance. The recurring winners:

  • Non-compete and restrictive covenant law. California is the leading example. Its Business and Professions Code § 16600 voids most restraints on the practice of a profession, and California courts and legislature have made clear that the policy is fundamental and will not yield to a foreign choice of law clause where a California resident's employment is at stake. Several other states have enacted statutes voiding out-of-state choice of law and forum clauses in employee non-competes. See Non-Compete Agreements Under Siege.
  • Consumer protection statutes, many of which contain anti-waiver provisions.
  • Franchise relationship laws, which commonly void contractual choice of law and forum provisions that deprive a franchisee of statutory protections. See Franchise Law Basics.
  • Insurance regulation, which is heavily state-specific and often mandatory.
  • Employment protections generally, including wage payment statutes.

Scope: the drafting error that undoes the clause

A clause reading "this Agreement shall be governed by the laws of State X" governs the contract. It may not govern:

  • Tort claims (fraud in the inducement, negligent misrepresentation, tortious interference);
  • Statutory claims;
  • Equitable claims (unjust enrichment); or
  • Claims by or against non-parties.

Plaintiffs exploit this constantly by pleading around the clause. The fix is a broad scope clause:

This Agreement, and all claims or causes of action (whether in contract, tort, statute, or otherwise) that may be based upon, arise out of, or relate to this Agreement or its negotiation, execution, performance, or termination, shall be governed by and construed in accordance with the laws of the State of ______, without regard to its conflict of laws principles.

Two further drafting points:

Exclude renvoi. "Without regard to its conflict of laws principles" prevents the chosen state's own choice of law rules from bouncing the analysis to a third state. Omitting it is a classic and avoidable error.

Consider the UN Sales Convention. For international sales of goods, the CISG applies automatically between parties in contracting states unless excluded. Choosing "the law of New York" does not exclude it, because the CISG is part of New York law by treaty. Say so expressly: "The United Nations Convention on Contracts for the International Sale of Goods shall not apply."

Dépeçage, and choosing different law for different issues

Nothing requires one law to govern everything. Parties sometimes select different law for different aspects (the law of the collateral's location for security interests, for example). Courts accept this, and it is sometimes the honest answer for a complex transaction. But it multiplies the analysis, and for ordinary commercial agreements a single governing law is better.

The internal affairs doctrine

One area where party choice is largely irrelevant: the internal affairs of a corporation (fiduciary duties, shareholder rights, board procedure, veil piercing in most courts) are governed by the law of the state of incorporation, regardless of what any contract says. That is why Delaware law follows Delaware entities everywhere. See Piercing the Corporate Veil.

Part II: Forum selection

Exclusive versus permissive: one word decides motions

The most consequential drafting distinction in this area, and the most frequently botched.

Permissive ("the parties consent to jurisdiction in the courts of X," "the parties submit to the jurisdiction of X"): the parties agree that the named forum may hear the case. It does not prevent suit elsewhere.

Exclusive ("all actions shall be brought exclusively in," "the courts of X shall have exclusive jurisdiction"): the named forum is the only permitted forum.

Courts construe these strictly. A clause that merely consents to jurisdiction will not support a motion to transfer or dismiss a case filed elsewhere. If you want exclusivity, use the words "exclusive" and "sole," and add "and the parties waive any objection to venue and any argument of inconvenient forum."

Be specific about which courts: "the state and federal courts located in New York County, New York" is clear; "the courts of New York" is ambiguous between state and federal and has generated real litigation. If you want to preserve the ability to remove to federal court, do not draft a clause limited to state court.

Enforceability

M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), replaced the older hostility to forum clauses with a presumption of enforceability. A clause should be enforced unless the resisting party clearly shows that enforcement would be unreasonable and unjust, that the clause was invalid for fraud or overreaching, or that enforcement would contravene a strong public policy of the forum.

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), extended the presumption to non-negotiated consumer contracts — a forum clause printed on a cruise ticket was enforced against passengers injured at sea — subject to fundamental fairness review. That decision is much criticized and is the doctrinal foundation for the forum clauses in nearly every online terms of service. See Website Terms of Service and Online Contract Formation.

What defeats a forum clause:

  • Fraud or overreaching in the inclusion of the clause itself (not merely fraud in the contract generally).
  • A forum so gravely inconvenient that the resisting party will "for all practical purposes be deprived of its day in court."
  • A statute voiding such clauses in the relevant category, of which there are many: franchise relationship acts, some consumer statutes, employee non-compete statutes in several states, and, for certain federal claims, anti-waiver provisions.
  • Fundamental unfairness in the consumer context.

Note what does not defeat it: that the clause was in a form contract, that it was not negotiated, that litigating away from home is expensive, or that the chosen forum's law is less favorable.

Atlantic Marine: the procedure

Atlantic Marine Construction Co. v. U.S. District Court, 571 U.S. 49 (2013), resolved the mechanics unanimously, and every litigator should know the three holdings.

1. A forum selection clause does not make venue improper. Venue is governed by § 1391. If the case satisfies § 1391 where it was filed, venue is proper, and Rule 12(b)(3) and § 1406 are the wrong tools.

2. The right tool depends on the chosen forum. If the clause points to another federal district, use § 1404(a) transfer. If it points to a state or foreign forum, use forum non conveniens, which the Court described as the doctrine § 1404(a) codified for federal-to-federal transfers.

3. The § 1404(a) analysis changes fundamentally when a valid clause exists:

  • The plaintiff's choice of forum merits no weight; the party defying the clause bears the burden of showing transfer is unwarranted.
  • The court must not consider the parties' private interests, which are deemed to weigh entirely in favor of the contractual forum. Only public interest factors (court congestion, local interest, familiarity with governing law) may be considered, and they "will rarely defeat a transfer motion."
  • The transferee court applies its own choice of law rules rather than those of the transferor, reversing the usual Van Dusen rule, so that a plaintiff gains nothing by filing in the wrong court.

The practical upshot: a well-drafted exclusive forum clause is close to self-executing in federal court.

Part III: The neighboring clauses

Four provisions travel with choice of law and forum selection, and they should be drafted as a set.

Consent to personal jurisdiction

A forum clause that says where suit must be brought does not, by itself, establish that the chosen court has power over the defendant. Add an express consent:

Each party irrevocably submits to the personal jurisdiction of such courts and waives any objection based on lack of personal jurisdiction, improper venue, or forum non conveniens.

Consent is an effective basis for personal jurisdiction; personal jurisdiction is a waivable individual right. Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694 (1982). Without the consent, a defendant in the chosen forum could still contest jurisdiction, which is an avoidable fight. See Personal Jurisdiction Over Online and Foreign Defendants.

Service of process

For counterparties abroad, add a clause appointing an agent for service in the chosen forum, or consenting to service by a specified method. This can save a year. Service on a foreign defendant under the Hague Service Convention is slow and, for some countries, very slow; a contractual agent in the forum bypasses it entirely. See Serving a Foreign Defendant Under the Hague Convention.

Jury trial waiver

Enforceable in federal court and in most states on a showing of knowing and voluntary waiver, and void by statute or decision in a few, notably California, where predispute jury waivers in contracts are unenforceable, and Georgia. Where a jury waiver is important and the governing law may not permit it, the standard workaround is a judicial reference provision (California) or an arbitration clause.

Draft it conspicuously — bold, capitalized, mutual, and in its own paragraph — because courts examining knowing waiver look at presentation.

Arbitration

An arbitration clause displaces the forum selection clause for arbitrable disputes and largely displaces the governing-law analysis for procedure. If you have both, they must be reconciled expressly:

  • State clearly what is arbitrable and what is not (injunctive relief for IP and confidentiality breaches is commonly carved out).
  • Specify the seat, the rules, the number of arbitrators, the language, and whether the award is confidential.
  • State that the forum selection clause governs actions in aid of arbitration and enforcement of awards.
  • Beware creating a Coinbase v. Suski problem: a later document with its own forum clause can supersede an earlier arbitration agreement, and a court, not the arbitrator, decides which contract governs. Audit every ancillary agreement (order forms, SOWs, promotional terms) for inconsistent dispute clauses.

See Arbitration, Mediation, and Choosing a Dispute Resolution Forum.

Part IV: How to choose

Choosing the governing law

Ask, in order:

  1. Is there a mandatory rule that will apply regardless? Employee non-competes, franchise relationships, insurance, consumer protection, and real property all have them. If so, the clause will not save you and the deal terms should be drafted to the mandatory rule.
  2. Which body of law is better for my client on the terms most likely to be disputed? Not "which is more sophisticated," but specifically: liquidated damages, limitation of liability, implied covenant, and termination.
  3. Is the law well developed and predictable? New York and Delaware are chosen so often partly for the depth of authority. Predictability has real value.
  4. Is there a substantial relationship, or a statute permitting the choice regardless? New York and Delaware both have enabling statutes for large commercial contracts.
  5. Does the client's counsel practice there? A governing law nobody on the team knows generates local-counsel cost on every question, not just in litigation.

Choosing the forum

  1. Home court is usually worth more than any doctrinal advantage: lower cost, known judges, known local rules, and a jury pool that is not hostile.
  2. Speed varies enormously by district and by state court system. If time matters, look at median time to trial.
  3. Enforceability of the eventual judgment matters most where the counterparty's assets are elsewhere. A judgment from a forum whose judgments the asset jurisdiction will not enforce is a moral victory. See Collecting a Judgment.
  4. Consistency with the governing law: a court applying its own state's law is faster and cheaper than a court applying another state's.
  5. Symmetry or asymmetry. Mutual clauses are the norm. One-sided clauses (only one party may sue at home) are enforceable in some contexts and are a red flag in consumer and employment settings.

Model language

Governing Law. This Agreement, and all claims or causes of action (whether in contract, tort, statute, or otherwise) based upon, arising out of, or relating to this Agreement or its negotiation, execution, performance, or termination, shall be governed by and construed in accordance with the laws of the State of ______, without regard to its conflict of laws principles. The United Nations Convention on Contracts for the International Sale of Goods shall not apply.

Forum; Jurisdiction; Service. Any action described above shall be brought exclusively in the state or federal courts located in ______ County, ______, and each party irrevocably (a) submits to the personal jurisdiction of such courts, (b) waives any objection to venue and any defense of inconvenient forum, and (c) consents to service of process by any means permitted by applicable law or by nationally recognized overnight courier to the address set forth in this Agreement. Nothing in this Section limits either party's right to seek injunctive relief in any court of competent jurisdiction to protect its intellectual property or confidential information.

JURY WAIVER. EACH PARTY KNOWINGLY, VOLUNTARILY, AND IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION DESCRIBED ABOVE.

Part V: The international layer

Cross-border contracts add three frameworks that change the calculus.

Rome I. Within the European Union, Regulation (EC) No 593/2008 governs the law applicable to contractual obligations. It generally honors party choice, but it protects consumers and employees by preserving the mandatory rules of their habitual residence or place of work, and it preserves the overriding mandatory provisions of the forum. A choice of New York law in a contract with an EU consumer will not displace the consumer protections of the consumer's home state. The same instinct that governs American mandatory rules applies, with a broader protected class.

The Hague Choice of Court Convention. The 2005 Convention obliges contracting states to give effect to exclusive choice of court agreements in civil and commercial matters and to recognize the resulting judgments. The European Union, the United Kingdom, Mexico, Singapore, and others are parties; the United States signed but has not ratified. Where it applies, it does for court judgments something like what the New York Convention does for arbitral awards, and it materially improves the value of an exclusive forum clause.

The New York Convention. The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards has over 170 contracting states and is the reason cross-border commercial contracts default to arbitration. An arbitral award is enforceable in far more places, on far narrower review, than a foreign court judgment. If the counterparty's assets are abroad, this consideration usually outweighs every other factor in the clause.

Practical sequence for an international contract: identify where the counterparty's assets are; ask whether a judgment from your preferred court would be enforced there; if not, arbitrate; then choose the substantive law and the seat separately, and confirm with local counsel whether any mandatory rule in the counterparty's jurisdiction (distributor protection, agency, labor, currency control) will apply regardless. See Cross-Border IP Litigation and Service Toolkit.

A worked example

Kestrel Robotics, Inc. (Delaware corporation, principal offices in Massachusetts) is signing a five-year exclusive distribution agreement with Camino Industrial S.A. de C.V. (Mexico), covering Latin America. Kestrel's form says New York law and New York courts.

Issue 1: Is New York appropriate? Neither party is in New York and no performance occurs there. New York General Obligations Law § 5-1401 permits the choice for contracts of at least $250,000 even absent a New York contact, and § 5-1402 permits consent to New York jurisdiction for contracts of at least $1,000,000, so the choice will likely be respected in a New York court. But a Mexican court asked to enforce the agreement may apply its own rules, including any mandatory distributor protections. The clause binds the parties; it does not bind a foreign court.

Issue 2: The CISG. Both the United States and Mexico are contracting states. If the agreement involves sales of goods, the CISG applies automatically. Choosing "New York law" does not exclude it. Exclude expressly, or decide affirmatively to keep it.

Issue 3: Enforcement. Camino's assets are in Mexico. A New York money judgment must be recognized there, which is possible but slower and less certain than an arbitral award. Mexico and the United States are both parties to the New York Convention on recognition of arbitral awards, which is why cross-border commercial agreements so often choose arbitration over litigation regardless of any other consideration. This is the decisive point, and it should drive the clause.

Issue 4: Distributor protection statutes. Several Latin American jurisdictions impose mandatory termination compensation for distributors and agents, and some void contrary choice of law and forum provisions. Local counsel must confirm before the clause is finalized, because if such a statute applies, the New York clause manages nothing and the termination provisions need to be drafted to the mandatory rule.

Recommended structure: New York substantive law; arbitration seated in a neutral, New York Convention jurisdiction under a recognized institutional rule set; a carve-out permitting either party to seek injunctive relief for IP and confidentiality in any competent court; express CISG exclusion; and a Mexican-law review of the termination provisions.

What Kestrel's form got wrong: it assumed a litigation forum where an arbitral award would be far more enforceable, and it did not address the CISG at all. Both were ninety-second fixes at drafting.

Drafting checklist

  • Governing law clause with a broad scope covering tort, statutory, and equitable claims and pre-contractual conduct.
  • "Without regard to conflict of laws principles" included.
  • CISG excluded (or expressly retained) for international goods contracts.
  • Substantial relationship confirmed, or an enabling statute identified.
  • Mandatory rules screened: non-competes, franchise, consumer, insurance, employment, real property.
  • Forum clause drafted as exclusive if exclusivity is intended, using "exclusive" and "sole."
  • Courts identified precisely (state and federal; named county).
  • Express consent to personal jurisdiction and waiver of venue and inconvenient-forum objections.
  • Service of process mechanism, including a forum agent for foreign counterparties.
  • Jury waiver, conspicuous and mutual, with a judicial reference fallback where jury waivers are void.
  • Arbitration clause reconciled with the forum clause, with carve-outs stated.
  • Every ancillary document (order form, SOW, promotion terms, DPA) audited for inconsistent dispute provisions and an order of precedence stated.
  • Enforceability of an eventual judgment or award in the jurisdiction where the counterparty's assets sit.

Frequently asked questions

Does a choice of law clause pick the court too? No. They are separate clauses answering separate questions. A New York governing law clause does not require a New York court, and many contracts sensibly pair one state's law with another state's forum.

Will a court really apply another state's law? Yes, routinely. Courts apply foreign state law all the time; the parties brief it, and it is treated as a question of law.

Can we choose the law of a state with no connection to us? Often yes, especially New York and Delaware, which have enabling statutes for larger commercial contracts. Absent such a statute, a court applying § 187 may disregard the choice if there is no substantial relationship and no other reasonable basis.

Our clause says "the parties consent to jurisdiction in Texas." Can we force a case filed in Ohio to move? Probably not. That is a permissive clause. Exclusivity requires words of exclusivity, and courts read these strictly.

What if we did not put in a governing law clause at all? The court applies the forum's choice of law rules, typically the "most significant relationship" analysis of Restatement § 188, weighing the place of contracting, negotiation, performance, the location of the subject matter, and the parties' domiciles. The result is less predictable and more expensive to litigate.

Do these clauses bind non-parties? Generally no, though courts have bound closely related non-signatories where the claims are intertwined with the contract and the non-party was foreseeably affected. Draft to cover affiliates and successors expressly if that is what you want.

Can a choice of law clause defeat a non-compete statute? Usually not where the employee's state has a strong policy, and several states now void out-of-state choice of law and forum clauses in employment restrictive covenants by statute. Draft the covenant to the law of the employee's actual location.

How do these clauses interact with arbitration? The arbitration clause governs arbitrable disputes; the forum clause governs court proceedings in aid of arbitration and enforcement. Inconsistency between them creates a threshold fight about which agreement controls, which a court decides.

Should a small business insist on its home forum? Usually yes, and it is the single most valuable term a small business can win, because litigating away from home multiplies cost and reduces the practical availability of the remedy. It is also the term the larger counterparty is most often willing to trade.

Does the clause matter if we never litigate? Yes. It shapes settlement value, because both sides price the dispute against the forum and the law that would apply. A favorable clause improves outcomes in cases that never reach a courtroom.

Closing thought

The boilerplate at the end of a contract is where the drafting attention runs out, and it is where the leverage in a future dispute is quietly allocated. A party that wins the governing law and the forum has, in effect, chosen the rules and the referee before the game starts.

Three habits capture most of the value. Draft the scope broadly, so a plaintiff cannot escape the clause by pleading fraud instead of breach. Use the word "exclusive" if you mean it, because courts will not supply it. And check for a mandatory rule before you spend any time on the rest, because in the areas where one exists — employment restraints, franchise relationships, consumer protection, insurance — the clause you negotiate is decoration.

Then reconcile the clause with every other document in the deal. The most common failure in modern contracting is not a badly drafted forum clause; it is three well-drafted forum clauses in three related documents that point in different directions.

Related articles

This article is provided for general informational purposes and does not constitute legal advice. Enforceability of choice of law and forum selection provisions varies by jurisdiction and by subject matter. Consult qualified counsel about any particular agreement or dispute.