If you’re running a startup or small business, contracts are part of daily life - customer terms, supplier agreements, SaaS subscriptions, contractor arrangements, partnership deals, and more.
And while most business owners focus on the commercial parts (price, deliverables, timelines), there’s one clause that can quietly shape your legal risk if things go wrong: the governing law clause.
A governing law clause is often treated like “boilerplate”. But in reality, it can decide which country or state’s laws apply to your contract, and that can affect everything from what counts as a breach, to what remedies are available, to how a dispute plays out.
Below, we’ll break down what a governing law clause does, when it matters most, and how to choose one that fits your business - in plain English, from an Australian small business perspective.
What Is A Governing Law Clause (And What Does It Actually Do)?
A governing law clause is a contract term that says which laws will be used to interpret and enforce the agreement.
In other words, if there’s a dispute about what the contract means or whether someone has breached it, the governing law clause tells everyone what “rulebook” applies.
Why This Matters In Real Life
Different laws can treat the same contract issue differently. For example, depending on the governing law, you may see differences in:
- how contracts are interpreted (strict wording vs broader commercial intention)
- how “good faith” arguments are handled
- what damages you can claim and how they’re calculated
- time limits for bringing claims
- whether certain disclaimers or limitations are enforceable
Even if you’re both “happy to sort it out”, disputes often escalate because the parties have different assumptions about what the contract requires. The governing law clause reduces uncertainty by choosing one set of laws to apply.
What A Governing Law Clause Typically Looks Like
You’ll usually see wording along the lines of:
“This Agreement is governed by the laws of New South Wales, Australia.”
Or, in an international deal:
“This Agreement is governed by the laws of England and Wales.”
That’s a simple sentence - but it can have a big impact.
Why Governing Law Is A Big Deal For Startups And Small Businesses
When you’re growing fast, it’s common to sign contracts that weren’t drafted for your business - like platform subscription terms, overseas supplier agreements, or customer contracts demanded by a larger client.
That’s often where governing law becomes a real issue, because it might not match where your business operates.
Common Scenarios Where Governing Law Really Matters
- You’re selling interstate: You might be based in QLD, but your biggest client is in VIC and sends you their contract template.
- You’re working with overseas customers or suppliers: International SaaS, manufacturers, developers, or distributors may push for their home jurisdiction’s laws.
- You’re scaling online: If you sell nationally (or globally), your terms and conditions might be used by customers you never meet in person.
- You’ve got investors or co-founders: Early-stage deals can turn into serious disputes later if documents aren’t aligned (especially if parties are in different states or countries).
It’s Not Just About “If You Get Sued”
Many business owners think this clause only matters if a dispute ends up in court. But governing law also affects:
- how confidently you can enforce your rights (or defend a claim)
- how expensive it may be to get legal advice (local vs foreign counsel)
- how negotiations unfold if something goes wrong (because each side has leverage depending on what law applies)
For a small business, reducing uncertainty and cost is often the main goal.
Governing Law vs Jurisdiction: Are They The Same Thing?
They’re related, but they’re not the same - and it’s very common to see them mixed up.
Governing Law
This answers: Which laws apply to the contract?
Example: “The laws of New South Wales apply.”
Jurisdiction (Or “Courts Of…”) Clause
This answers: Where will disputes be heard?
Example: “The parties submit to the non-exclusive jurisdiction of the courts of New South Wales.”
Why You Should Try To Align Them
In many cases, you’ll want the governing law and jurisdiction to match, like:
- NSW governing law + NSW courts
- VIC governing law + VIC courts
If they don’t match, you can end up with messy outcomes (for example, arguing about NSW law in a different court system, or fighting about where proceedings should be brought).
That doesn’t mean you can’t have different governing law and jurisdiction, but if you do, it should be a deliberate choice - not an accident from copying and pasting templates.
What About Arbitration Clauses?
Some contracts use arbitration instead of courts. In that case, you might see:
- a governing law clause (still relevant for interpreting the contract)
- an arbitration “seat” (which can affect procedure and court supervision)
- an arbitration institution/rules (how the arbitration runs)
This is common in cross-border deals. If you’re signing something with arbitration language and a foreign governing law clause, it’s worth slowing down and getting it reviewed.
How Do You Choose The Right Governing Law Clause For Your Business?
There’s no single “best” governing law for every contract. The right choice depends on your risk, bargaining power, and where the work (and the parties) actually are.
Here’s a practical way to think about it as an Australian startup or small business.
1. Start With Where Your Business Operates (And Where You Can Enforce Rights)
If you’re an Australian business primarily selling and delivering in Australia, it’s usually sensible to choose an Australian governing law (often your home state).
This can reduce costs and complexity because your lawyers, your evidence, and your operations are here.
2. Think About Who Has More Bargaining Power
In a perfect world, you’d always choose your own state or Australia as the governing law. But in reality:
- large customers may insist on their template
- overseas suppliers may refuse to change the clause
- platform terms (SaaS tools, marketplaces) often have “take it or leave it” governing law clauses
If you can’t change it, your job becomes risk management: understand what you’re agreeing to and build protections elsewhere in the contract (and your operations).
3. Make Sure The Contract Is Actually “Tied” To The Place You Choose
Courts will often give effect to governing law clauses, but there are important exceptions (for example, where mandatory laws apply, where a clause conflicts with public policy, or where consumer protection laws can’t be contracted out of). As a practical rule, you also want the nominated place to make commercial sense.
If your agreement has nothing to do with the place nominated, it can create enforcement headaches and negotiation problems.
4. Consider What Happens If There’s A Dispute
Ask yourself:
- If a dispute happens, could you realistically enforce the contract under that governing law?
- Would you need to hire lawyers in another country?
- Would you need to travel or gather evidence offshore?
- Would the other party have assets where you can enforce a judgment?
A contract is only as useful as your ability to enforce it in the real world.
5. Get The Basics Right Elsewhere In The Contract
Even the “best” governing law clause won’t save a contract that’s unclear or missing key commercial terms.
Clear drafting is still the foundation. If you’re unsure whether your agreement is enforceable in the first place, it helps to understand what makes a contract legally binding and how offer and acceptance works in practice (especially for quotes, emails, and online checkouts).
What Other Clauses Should You Check Alongside Governing Law?
A governing law clause is important, but it’s rarely the only “hidden risk” in a contract.
If you’re reviewing an agreement (or drafting your own template), these clauses usually deserve attention at the same time - because they interact with your governing law and can change your exposure if something goes wrong.
Limitation Of Liability (And Exclusions)
This is one of the biggest risk levers in most commercial contracts.
A limitation of liability clause can cap what you’re responsible for, exclude certain types of loss, and allocate risk between the parties. Whether these clauses are enforceable (and how they’re interpreted) can depend on the governing law, any mandatory laws that apply (including the Australian Consumer Law in relevant cases), and the context of the deal.
For a deeper look at how these clauses work in practice, limitation of liability clauses are worth understanding before you sign anything high-value or long-term.
Set-Off Clauses
Set-off clauses deal with whether a party can withhold or reduce payment because they say you owe them something (for example, because they claim you breached the contract).
For small businesses, this can be a cashflow issue as much as a legal issue. Some contracts heavily favour the customer by giving them broad set-off rights.
It’s a good idea to check set-off clauses alongside the governing law clause, because governing law can affect how payment disputes play out and how strictly the clause is read.
Assignment (Can The Other Party Transfer The Contract?)
Assignment clauses control whether one party can transfer their rights (and sometimes obligations) to someone else - for example, if your customer is acquired and wants to “move” the contract to a new entity.
Startups often sign agreements early, then later find out the contract has been assigned to a new party with different expectations. That’s why assignment of contracts is worth checking carefully.
Novation (Replacing A Party Entirely)
Novation is different from assignment. A novation typically replaces one party with another, so a new entity steps into the shoes of the old one - often with a new set of obligations.
This comes up in business restructures, group companies, and when a startup raises capital and changes entities.
If your business is growing and you expect entity changes, Deed of Novation concepts matter because they can affect whether contracts can follow your business as it evolves.
Practical Tip: Don’t Treat These Clauses As “Boilerplate”
In a dispute, the commercial terms tell you what should have happened, but the “legal mechanics” clauses tell you what you can actually do about it.
If you’re inheriting a contract template from a customer or supplier, it’s often worth getting a quick review - particularly where the governing law is overseas or the contract is high value. A contract review can help you spot clauses that look standard but create real risk for your business.
Key Takeaways
- A governing law clause decides which laws will be used to interpret and enforce your contract if there’s a dispute (noting that some mandatory laws may still apply regardless of what the contract says).
- Governing law is different from a jurisdiction clause - governing law is the “rulebook”, jurisdiction is the “venue”.
- For many Australian startups and small businesses, an Australian governing law (often your home state) is the most practical option, but bargaining power can affect what you can negotiate.
- International or interstate contracts are where governing law clauses matter most, because they can increase cost and complexity if things go wrong.
- It’s smart to review governing law alongside other high-impact clauses like limitation of liability, set-off, assignment, and novation.
- Clear drafting and enforceable agreement fundamentals still matter - a good governing law clause won’t fix a contract that’s unclear or incomplete.
If you’d like help reviewing or drafting a contract with the right governing law clause for your business, reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
This article is general information only and does not constitute legal advice. For advice tailored to your situation, speak to a lawyer.
