Governing Law Clauses In Australian Contracts: What They Mean

When you’re building a startup or running a small business, contracts can start piling up quickly - customer terms, supplier agreements, software subscriptions, contractor arrangements, partnership deals, and more.

One clause that often gets copied and pasted without much thought (until something goes wrong) is the governing law clause.

If you’ve ever wondered: “Does it really matter which state or country’s law applies?” - the answer is yes. Having a clear governing law clause in Australia can save you time, cost, and stress if a dispute comes up, particularly if you deal with customers, suppliers, or partners across different states or overseas.

Below, we’ll walk you through what a governing law clause is, when you need it, common mistakes we see, and how to choose the right governing law for your business contracts.

What Is A Governing Law Clause In Australia?

A governing law clause (sometimes called an “applicable law” clause) is a section in your contract that states which jurisdiction’s laws will be used to interpret and enforce the agreement.

In an Australian context, this usually means choosing one of the following:

• the laws of a particular Australian state or territory (for example, New South Wales, Victoria, Queensland), or
• the laws of the Commonwealth of Australia, usually with an associated state or territory specified for the courts that will deal with any dispute.

If you deal internationally, it might also specify a foreign country (for example, “the laws of Singapore”). That’s where things can get complex fast.

Governing Law vs Jurisdiction: They’re Not The Same

This is where many small businesses get tripped up.

• Governing law tells you what rules apply to the contract.
• Jurisdiction (or “courts” clause) tells you where disputes will be heard (for example, “the courts of New South Wales”).

You can choose NSW law as the governing law but also say disputes must be heard in Victorian courts - but that can create procedural headaches, and it’s often not what you intended.

In most situations, it’s cleaner to align them (for example, NSW governing law + NSW courts).

Why This Clause Matters More Than You Think

If a dispute arises and your contract doesn’t clearly state the governing law, you may end up arguing about the “choice of law” before you even get to the real issue.

That can mean:

• more legal fees;
• delays in resolving the dispute;
• uncertainty about your rights and obligations; and
• in some cases, needing advice in multiple jurisdictions.

For startups, this is particularly painful - disputes are already disruptive, and you don’t want to burn runway on preventable contract ambiguity.

When Do You Need A Governing Law Clause (And When Is It Critical)?

Technically, many contracts will still be enforceable without a governing law clause, but it’s risky to rely on that.

A governing law clause is especially important when:

You Deal Across State Lines In Australia

Even within Australia, there are differences between state and territory laws and court procedures. While many principles of contract law are broadly similar, there can be important differences in areas like:

• industry-specific regimes (for example, security of payment laws in construction);
• limitation periods and how they apply in practice;
• some state-based rules around workplace surveillance, recording, and monitoring; and
• local procedural requirements in the courts where a dispute is heard.

If your business is based in Queensland but your client is in Victoria, you’ll generally want to be deliberate about what you’re choosing.

You Sell Online Or Provide Services Remotely

If you sell nationwide through a website, you might have customers “everywhere” (and sometimes, overseas). Your website terms should still clearly say what law applies.

This is one reason online businesses often put strong foundations in place early with properly drafted terms, privacy settings, and customer protections, especially if the offering is subscription-based or recurring.

You Work With Overseas Customers, Suppliers Or Contractors

International contracts introduce extra complexity, including:

• different legal systems and terminology;
• enforcement challenges (even if you “win”, can you collect?);
• cost and logistics of resolving disputes; and
• potential mismatches between governing law and dispute resolution processes.

If you’re signing an international deal, it’s worth getting advice on the governing law and jurisdiction package as a whole, not as stand-alone wording.

You’re Taking Investment Or Formalising A Founder Relationship

When you bring in co-founders or investors, you’re not just signing a contract - you’re locking in decision-making mechanics that could impact your business for years.

In those cases, governing law is one small part of a bigger risk-management strategy that usually includes documents like a Shareholders Agreement (for companies), plus well-thought-out dispute resolution provisions.

How Do You Choose The Right Governing Law Clause In Australia?

There isn’t one “best” governing law for every business. The right answer depends on where you operate, where the other party is located, and how the contract will actually be performed.

That said, here are practical factors many startups and small businesses consider.

1. Choose A Jurisdiction You Understand (And Can Access)

For most Australian small businesses, it’s sensible to choose the law of the state or territory where your business is based and where you can realistically manage a dispute.

For example:

• If your business operates primarily in NSW, NSW law may be a sensible default.
• If your team, customers, and operations are mostly in Victoria, Victorian law may make more sense.

This isn’t about “gaming the system” - it’s about predictability and practicality.

2. Align Governing Law With Your Dispute Resolution Plan

Think about what you want to happen if there’s a problem. Do you want negotiation first? Mediation? A particular court? Arbitration?

If you choose “the laws of Queensland” but the contract says disputes must be heard in NSW courts, you may be creating unnecessary complexity.

For many standard commercial agreements, aligning governing law and the courts is a simple way to reduce friction.

3. Consider What’s “Fair” Enough That The Other Party Will Sign

Contracts are commercial tools. The best governing law clause in the world doesn’t help you if the other side refuses to sign, or insists on renegotiating the entire agreement.

A practical approach is to pick a governing law that is:

• connected to the transaction (for example, where services are delivered);
• predictable and familiar; and
• not overly burdensome for the other side.

If you’re the smaller party (for example, signing a big supplier’s standard terms), you may not get much choice - but it’s still worth understanding what you’re agreeing to.

4. Watch Out For “Foreign Law” Clauses In Standard Templates

One of the most common issues we see is an Australian business using an overseas template (or a contract generated by a global platform) that states something like:

• “This Agreement is governed by the laws of California, USA.”
• “The parties submit to the exclusive jurisdiction of the courts of England and Wales.”

That might look harmless until you have a dispute - and then you may be dealing with overseas lawyers, overseas court processes, and very different legal rules.

If you’re trading primarily in Australia, it’s usually worth tailoring your contracts to Australian settings rather than relying on generic foreign templates.

Common Governing Law Clause Mistakes (And How To Avoid Them)

A governing law clause can be short, but a small drafting mistake can have outsized consequences.

Mismatch Between Governing Law And Jurisdiction

As mentioned above, mixing “laws of X” with “courts of Y” can create complexity.

Sometimes it’s intentional, but often it’s the result of copy/paste from different templates.

If you want disputes handled in a particular state, it’s typically cleaner to match the governing law and the courts of that state.

Using Vague Wording Like “The Laws Of Australia” Without More Detail

Sometimes contracts say “governed by the laws of Australia” but don’t specify the courts. In practice, disputes still need to be dealt with somewhere.

For clarity, many businesses include both:

• governing law (often a specific state/territory), and
• jurisdiction (the courts in that state/territory).

Assuming A Governing Law Clause Overrides Mandatory Australian Laws

Even if your contract picks a governing law, you may still be subject to mandatory laws that apply regardless.

For example, if you sell to Australian consumers, the Australian Consumer Law (ACL) can still affect what you can and can’t contract out of - including consumer guarantees around acceptable quality and remedies.

It’s one reason businesses should be careful when drafting warranties, returns policies, and limitation of liability language. Clauses that try to exclude non-excludable rights can create compliance issues.

It’s also why the rest of your contract needs to be consistent with Australian requirements - not just the governing law clause. (A limitation of liability clause, for example, needs careful drafting in context.)

Not Updating Contracts As Your Business Expands

Your “startup contract” from year one might not suit your business in year three.

For example, if you started as a sole trader in one state but now:

• operate nationally,
• have contractors in multiple states,
• sell internationally, or
• have converted into a company,

then your contract settings (including governing law) may need a refresh.

This often comes up when businesses introduce new legal documents like a Company Constitution or update internal processes as they scale.

What Should A Governing Law Clause Include?

A governing law clause in Australia is often short, but a well-drafted clause is usually paired with a jurisdiction clause and sometimes a dispute resolution clause.

Here are common elements to consider.

1. The Governing Law

This states which laws apply. For example: “This Agreement is governed by the laws of New South Wales.”

The key is to be specific.

2. The Courts / Jurisdiction

This states where disputes will be heard. For example: “The parties submit to the exclusive jurisdiction of the courts of New South Wales.”

Exclusive means disputes must be brought there (generally). Non-exclusive means disputes can be brought there, but also potentially elsewhere.

3. Dispute Resolution Steps (Optional, But Often Useful)

Many businesses include steps like:

• good faith negotiation for a set period;
• mediation before court proceedings; and/or
• arbitration (more common in certain industries and international contracts).

For startups, dispute resolution clauses can be a practical way to encourage early resolution before things escalate into expensive litigation.

4. Consistency With The Rest Of Your Contract

This is easy to overlook. Your governing law clause must “fit” with the rest of the agreement, including:

• your payment terms and enforcement rights;
• your limitation of liability language;
• termination and notice clauses; and
• consumer law compliance (where relevant).

This is why it’s generally best to treat governing law as part of your overall contract strategy, rather than a last-minute add-on.

What Other Legal Documents Should You Review Alongside Governing Law?

A governing law clause is important, but it rarely stands alone. In practice, it’s one part of a broader “risk and compliance” framework for your business.

Depending on how your business operates, you may also want to review (or put in place) the following documents.

• Customer terms (especially if you sell online, offer subscriptions, or provide services on recurring billing cycles).
• Privacy documentation if you collect personal information (which most businesses do through websites, marketing, customer accounts, or enquiries). A Privacy Policy is a common starting point.
• Employment documents if you hire staff, such as an Employment Contract (and related workplace policies) to reduce misunderstandings about pay, duties, and termination.
• Contract variation processes so you can update terms properly as your business changes (particularly if you work with long-term clients or enterprise customers).
• Founder / ownership documentation (if you run a company with multiple owners), including a Shareholders Agreement to set expectations around decision-making, exits, and dispute management.
• Payment terms and debt recovery settings so it’s clear when invoices are due and what happens if they’re not paid. (This often goes hand-in-hand with your main customer or supply contract.)

If you’re growing quickly, it’s also worth doing a broader legal review of your contract suite to ensure it’s consistent and still fit for purpose.

Key Takeaways

• A governing law clause in Australia sets out which jurisdiction’s laws will apply to interpret and enforce your contract, which can reduce uncertainty and disputes about process.
• Governing law is different from jurisdiction - it’s usually best to align the governing law with the courts where disputes will be heard.
• This clause is especially important if you sell online, contract across state borders, work internationally, or enter into higher-stakes agreements (like founder and investment deals).
• Common mistakes include copying overseas templates, using vague wording, or drafting inconsistent governing law and jurisdiction provisions.
• Governing law is only one part of a strong contract setup - your broader documents (customer terms, privacy, employment, and founder documents) should work together to manage risk.

This article is for general information only and does not constitute legal advice. If you’d like help reviewing or drafting a contract with the right governing law clause for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.