In a contract between a California company and a foreign counterparty, one short clause quietly decides more than almost any other: the governing law provision. It determines which country's rules fill the gaps, which warranties apply by default, and how every other clause will be read if the deal goes sideways. Yet it is often pasted in from a template without thought. Here is how to choose deliberately.
What a governing law clause actually does
The governing law (or "choice of law") clause selects the substantive law that a court or arbitrator will apply to interpret the contract and resolve disputes under it. It answers questions the contract itself does not: What counts as a material breach? What damages are recoverable? Is that limitation of liability enforceable? Are there implied warranties or good-faith duties layered on top of the text? Two contracts with identical wording can produce different outcomes under California law, English law, or German law.
It is worth separating three clauses that travel together but do different jobs:
- Governing law — whose substantive rules apply;
- Forum selection — which courts hear the dispute or which arbitral seat governs the arbitration;
- Dispute resolution — litigation or arbitration, and under what rules.
A common drafting failure is choosing California law but leaving the forum open, which can strand a California company arguing California law before a foreign court that applies it imperfectly — or not at all.
How California treats the parties' choice
California courts generally respect a contractual choice of law. Under the framework adopted in Nedlloyd Lines B.V. v. Superior Court (1992), the chosen law will be applied if the chosen state or country has a substantial relationship to the parties or the transaction, or there is any other reasonable basis for the choice — unless applying it would conflict with a fundamental policy of a state that has a materially greater interest in the issue and whose law would otherwise apply.
California adds a statutory boost for commercial deals: Civil Code § 1646.5 provides that parties to a contract relating to a transaction of $250,000 or more may choose California law even without any other connection to California. Combined with Code of Civil Procedure § 410.40, which lets parties to such contracts consent to California courts, this makes California a deliberately available neutral venue for international commerce.
The "fundamental policy" limit has teeth, though. California will not let a choice of foreign or sister-state law override protections it considers fundamental — for example, the state's restrictions on non-compete covenants (Bus. & Prof. Code § 16600) or certain employee protections (Lab. Code § 925 limits choice of law and forum clauses imposed on California employees). A clause that works in a supply agreement may fail in an employment or distribution context.
The CISG: the default you did not know you chose
Here is the trap that surprises even sophisticated parties. The United Nations Convention on Contracts for the International Sale of Goods (CISG) automatically governs contracts for the sale of goods between parties in different contracting states — and the United States, China, Germany, Japan, Canada, Mexico, and most major trading nations are members. Because the CISG is a U.S. treaty, a clause saying the contract is governed by "the laws of the State of California" arguably includes the CISG rather than excluding it, since federal treaties are part of the law applied in California.
The CISG differs from the UCC in meaningful ways: no parol evidence rule, different offer-and-acceptance mechanics, different notice and cure regimes. If you want the familiar UCC, say so expressly: "The CISG does not apply to this Agreement." If the CISG's framework actually suits your deal — it is neutral and widely interpreted — you can keep it, but that should be a decision, not an accident.
Choosing well: a short framework
- Prefer law you and your counsel know. For a California company, California law is usually the strongest starting position — predictable, well-developed, and inexpensive to get advice on.
- If you must compromise, choose a neutral, developed body of commercial law — English law and New York law are the common global compromises — rather than the counterparty's home law.
- State the CISG's application or exclusion expressly in any cross-border goods contract.
- Align law, forum, and enforcement. Choose a forum whose judgments or awards you can actually enforce where the counterparty's assets are — often the decisive argument for arbitration in cross-border deals.
- Check mandatory local law. Some countries impose non-waivable rules on distributors, agents, and employees that apply regardless of your clause.
Governing law is one piece of a coherent international business strategy that should run through your contract templates — the clause only protects you if the rest of the agreement is drafted with that law in mind.
Talk to a California business attorney
Before you sign a cross-border agreement — or standardize your international templates — it is worth an hour to get the governing law, forum, and enforcement pieces aligned. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
