governing law
Definition
Governing law is the clause in a contract that specifies which state's or country's laws will be used to interpret and enforce the agreement if a dispute arises. Think of it as the rulebook that a judge or arbitrator must follow when deciding who is right and who is wrong in a disagreement between the parties.
Example
If you sign a contract with a vendor in California but your business is in Texas, the governing law clause might state that California law controls, meaning a court would apply California's rules to settle any fight over that contract.
Watch Out
The state named in the governing law clause can significantly affect your rights, so you should always check that it is a state whose laws you understand and that treats your type of business fairly.
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This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.