A governing law clause in your commercial contract is a powerful tool, but it is not an absolute guarantee that your chosen state’s law will apply in every dispute. Courts have the authority to override a contractual governing law choice in specific circumstances, and understanding when and why they exercise that authority is essential for any business owner who relies on a governing law provision to achieve predictable legal outcomes. The doctrine that governs these situations is called conflict of laws, sometimes also referred to as private international law in cross-border contexts.
Conflict of laws is the body of legal rules that courts apply to determine which jurisdiction’s substantive law governs a dispute when the transaction involves connections to more than one state or country. In a world where commercial parties routinely do business across state lines, and where contractual relationships may involve parties, performance, and effects in multiple jurisdictions, conflict of laws questions arise frequently. Most of the time, a governing law clause resolves them. But when a court finds a reason to override the clause, the result can be the application of legal rules the parties never contemplated and never agreed to.
The General Rule: Governing Law Clauses Are Enforceable
The starting point in American conflict of laws analysis is that governing law clauses in commercial contracts between sophisticated parties are presumptively enforceable. Courts respect the parties’ freedom to designate the legal system that will govern their agreement, and courts in states like Delaware and New York have consistently upheld governing law choices even when the designated state has limited connection to the parties or the transaction. The rationale is straightforward: allowing commercial parties to select predictable governing law promotes commercial certainty, reduces litigation, and encourages commercial activity.
The Restatement (Second) of Conflict of Laws, which most states have adopted as their framework for choice of law analysis, provides that parties to a contract may choose the law of any state to govern their rights and duties, subject to limited exceptions. The Uniform Commercial Code Article 1 contains a similar provision for contracts involving the sale of goods, allowing parties to choose any state’s law as long as the transaction bears a reasonable relation to that state. These frameworks together support a strong policy of enforcing parties’ governing law choices.
New York has reinforced this policy with General Obligations Law Section 5-1401, which specifically validates New York governing law clauses in contracts involving at least $250,000 without requiring any connection to New York. Delaware courts similarly enforce governing law clauses with minimal scrutiny when the contracting parties are sophisticated commercial entities. For well-drafted agreements between commercially sophisticated parties, the governing law clause will be honored in the overwhelming majority of cases.
The Fundamental Public Policy Exception
The most important exception to governing law clause enforceability is the fundamental public policy doctrine. Under this doctrine, a court will decline to apply the chosen law if it would violate a fundamental public policy of the state whose law would otherwise govern in the absence of the parties’ choice, or if it would violate a fundamental public policy of the forum state. Not every policy preference that one state has but another does not qualifies as a fundamental public policy; the doctrine is reserved for policies that the forum state has declared particularly important to protect.
California provides the most frequently cited examples of fundamental public policy overrides. California Business and Professions Code Section 16600’s prohibition on restraints of trade has been held by California courts to reflect a fundamental public policy of California, such that California courts will apply California law to invalidate non-compete agreements even when the contract specifies a different governing law. A California court will enforce Delaware or New York law on most questions, but on the specific question of whether a non-compete or non-solicitation restriction is valid, California courts have consistently applied California law over the parties’ contractual choice.
Other states have invoked the fundamental public policy exception in various contexts. New Jersey courts have applied New Jersey franchise relationship law to protect franchisees notwithstanding governing law clauses designating other states. Several states have applied their wage and hour statutes to protect workers under California-like circumstances, holding that the protections of those statutes constitute fundamental public policy that cannot be waived by contract. State consumer protection statutes have similarly been held by courts in consumer-friendly states to represent fundamental policies that override contractual governing law choices in appropriate cases.
The fundamental public policy exception does not apply whenever the designated state’s law differs from the forum state’s law on some issue. The policy must be genuinely fundamental, meaning the state has made a clear legislative or judicial declaration that the specific rule is a matter of significant public importance rather than merely a default rule that parties can contract around. Courts distinguish between fundamental public policies, which override contractual choice, and weaker policy preferences, which do not. Drawing this line requires careful analysis of the specific law at issue and the state’s characterization of its own policies.
The Reasonable Relationship Requirement
A second basis for overriding a governing law clause is the absence of a reasonable relationship between the chosen state and the parties or the transaction. Courts will sometimes refuse to honor a governing law clause when the designated state has no connection to either party or to any aspect of the transaction, and when the parties have no apparent legitimate reason for choosing that state’s law. The concern is that a wholly unconnected governing law choice might be an attempt to avoid legal protections that would otherwise apply.
In practice, the reasonable relationship requirement is rarely a barrier for commercial parties who choose well-established commercial law states like Delaware or New York. Courts have consistently held that choosing the law of a state because it has well-developed commercial law, predictable courts, or a particular body of corporate jurisprudence is a legitimate basis for the choice even in the absence of other connections. New York’s statute specifically endorses this approach by validating New York governing law clauses in contracts meeting the dollar threshold without requiring any other New York connection.
The reasonable relationship requirement becomes more relevant when parties choose unusual or unexpected governing law states that clearly offer no commercial advantage and whose selection appears designed primarily to escape the protections of the state with the most obvious connection to the deal. Even then, courts are reluctant to override governing law choices in commercial contracts between sophisticated parties unless the specific provision at issue runs afoul of a fundamental public policy.
How Courts Conduct Conflict of Laws Analysis
When a court finds it necessary to override a governing law clause, it applies its own conflict of laws rules to determine which state’s law should govern instead. Different states use different conflict of laws frameworks, which can produce different outcomes in otherwise identical factual situations. The most widely used framework is the Restatement (Second) approach, which directs courts to identify the state with the most significant relationship to the contract and the parties, considering factors such as the place of contracting, the place of negotiation, the place of performance, the location of the subject matter of the contract, and the domicile and place of business of the parties.
Some states, particularly in the context of tort claims, apply the lex loci delicti rule, which designates the law of the place where the allegedly wrongful act occurred. A few states apply an interest analysis approach, asking which states have a genuine interest in having their law applied and giving effect to the state with the strongest interest. And some states apply a most significant contacts test or a governmental interest analysis that weighs multiple factors. The lack of uniformity in conflict of laws methodology means that the same dispute might be governed by different law depending on which state’s courts are hearing it.
This variation underscores one of the key reasons to include a governing law clause in the first place: without one, the analysis of what law applies is unpredictable and jurisdiction-dependent. Even with a governing law clause, the possibility of override means that you cannot be entirely certain which law will ultimately apply to every issue in a multi-state dispute. But a well-chosen governing law clause, paired with a carefully chosen forum selection clause that directs disputes to courts whose conflict of laws rules are favorable to honoring your choice, substantially reduces this uncertainty.
Depecage: Different Laws for Different Issues
One aspect of conflict of laws analysis that surprises many business owners is the concept of depecage, which refers to the application of different states’ laws to different issues within the same dispute. A single contract dispute might be governed by Delaware law on contract interpretation questions, California law on non-compete enforceability, and the forum state’s law on procedural matters. Courts can and do apply different laws to different aspects of a case, and a single governing law clause may not be sufficient to avoid this fragmentation.
Depecage is most likely when specific issues in the dispute implicate fundamental public policies of states other than the one designated in the governing law clause, or when the dispute involves issues that are categorized differently under conflict of laws analysis. For example, whether a non-compete is enforceable might be classified as a question of the law of the state where the employee worked, while whether the contract was properly formed might be classified as a question of the law of the state where the contract was signed. These are separate issues, and different states’ laws might apply to each.
The practical implication of depecage for business owners is that a governing law clause provides a strong, but not unlimited, solution to multi-state legal uncertainty. For the most important specific provisions in your contracts, such as non-competes, limitation of liability clauses, and arbitration provisions, confirm how those specific provisions are treated in the states where your counterparties are located, not just under your designated governing law. This targeted analysis, rather than sole reliance on the governing law clause, is the most reliable way to assess and manage the risk of override.
Minimizing the Risk of Override
The most effective strategy for minimizing the risk that a court will override your governing law choice is to choose a governing law state whose law does not depend on overriding fundamental public policies of states where you operate or where your counterparties are located. If California counterparties are common in your business, and non-competes are important to your business model, you should not rely on a Delaware or New York governing law clause to make California non-competes enforceable. You need a different approach to protecting your business interests that does not depend on overriding California’s fundamental public policy.
Pairing your governing law choice with a carefully chosen forum selection clause also reduces override risk. Courts are more likely to honor the governing law choice when they are sitting in the designated governing law state, because those courts are most familiar with their own law and least likely to find a fundamental public policy reason to apply different law. A Delaware governing law clause paired with a Delaware forum selection clause means the dispute will be heard by Delaware courts applying Delaware law, which is the strongest protection against override.
When you operate in states with a particularly high override risk on specific issues, use state-specific contract addenda that address those states’ requirements rather than relying on a general governing law clause to overcome the problem. This approach, while requiring more drafting effort, produces contracts that work reliably in every state without depending on override risk analysis. It is more work upfront but produces far more predictable outcomes when disputes actually arise.