A "choice of law" or "governing law" provision in a contract allows the parties to agree that a particular state's laws will be used to interpret the agreement, even if they live in (or the agreement is signed in) a different state. For example, many big corporations choose Delaware law in their contracts' choice of law provisions, because that state's laws often favor corporations and offer some predictability when it comes to disputes. Read on to learn more about choice of law provisions in contracts. (For explanations of other clauses you're likely to find in a written agreement, check out Nolo's article Common Boilerplate Provisions in Contracts.)
Let's say you're a potato farmer in Michigan, and you're entering into a contract with a chain of food stores. Can you request that any disputes under your contract be decided under Idaho law (which you suspect favors potato farmers) even though neither party has anything to do with Idaho? That depends.
In this example, using Idaho law may not fly because courts usually look for some connection between the chosen state and either the transaction (let's say the contract was signed there) or the parties (one of the parties operates a business in the state, for example). A choice of law provision may also run into problems if it appears in an insurance contract, because some states want to make sure their consumer protection laws relating to insurance apply to those within their borders. (Massachusetts, for example, prohibits choice of law provisions in insurance contracts.) Some contracts involving secured transactions and the Uniform Commercial Code (UCC) may also conflict with choice of law rules. Also, contracts governing corporate behavior usually must be decided by the law of the state of incorporation. Generally, however, the differences in state law are not great enough to make this a major negotiating issue for most parties.
Jurisdiction refers to where a dispute will be resolved; governing law indicates which state's law will be used to decide the dispute. It's possible, for example, for a contract to require lawsuits to be filed in California but decided under New York law. The selection of which state is used for governing law is not often a crucial negotiating issue. But the selection of the state for jurisdiction can be more important: If there's a dispute, that's where everyone will have to go to resolve it. Sometimes these two provisions are grouped into one paragraph.
After all this discussion, you may be surprised to know that within the body of a contract, a choice of law provision is usually very brief and to the point. Here's an example of a provision regarding governing law in a contract (something like this is probably all you need):
Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts.
Get more practical advice on getting your agreement in writing with Nolo's article 10 Tips for Making Solid Business Agreements and Contracts. If you're looking for an A to Z guide to everything you need to know about contracts, get Nolo's new book Contracts: The Essential Business Desk Reference, by attorney Rich Stim.