Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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When you sign a contract, you’re agreeing to much more than just the price and delivery date. You’re also agreeing to the legal rules that will apply if something goes wrong. That’s where the governing law clause comes in.
For Australian small businesses, picking the right governing law is a simple clause with big consequences. It affects how your contract is interpreted, which consumer and business laws apply, and how costly a dispute might be to resolve.
In this guide, we’ll unpack what governing law means, how it differs from jurisdiction, how to choose the right option for your business, and practical drafting tips to protect your position. We’ll also flag common pitfalls we see in small business contracts and how to avoid them.
What Is A Governing Law Clause (And How Is It Different From Jurisdiction)?
A governing law clause states which legal system will apply to your contract. In Australia, this usually means nominating the law of a particular state or territory (for example, “the laws of New South Wales”).
By contrast, a jurisdiction clause addresses where disputes will be heard. It directs the parties to a particular court or tribunal, or sometimes to arbitration. Together, these two clauses determine both the “rulebook” and the “playing field” if there’s a disagreement.
Why the distinction matters
- Governing law determines how the contract is interpreted (for example, rules about implied terms, limitation periods and damages).
- Jurisdiction determines where you can start proceedings and which court has authority to hear the dispute.
- It’s possible to choose one state’s governing law but a different forum for jurisdiction (though this is less common for small businesses).
If a contract is silent on governing law, a court will decide based on connecting factors (like where the contract was formed, where performance occurs and where the parties are based). That uncertainty can become expensive quickly.
Why Governing Law Matters For Small Businesses
It’s easy to focus on price, scope and timing. But the boilerplate matters just as much. Here’s why the governing law clause deserves your attention:
- Certainty and predictability: You know which rules apply and can plan your risk and compliance accordingly.
- Cost and convenience: Choosing your home state’s law can make disputes faster and cheaper to manage.
- Consistency across contracts: Standardising governing law across your Terms of Trade and Customer Contract helps your team and advisers give clear guidance.
- Interaction with other clauses: Governing law can impact how your limitation of liability clause or indemnities are read, and whether certain remedies are available.
- Consumer and small business protections: Even if you choose a particular law, mandatory protections (like the Australian Consumer Law’s unfair contract terms regime) can still apply. A governing law clause can’t contract out of laws that are required to apply.
For example, if you supply nationally, a standard choice like “the laws of Victoria” gives you a single rulebook. If you operate primarily in Queensland, choosing Queensland law aligns the contract with your local advisers and courts.
How Do You Choose The Right Governing Law In Australia?
There’s no one-size-fits-all answer, but these factors will steer you in the right direction.
1) Where is your business based?
If your operations, staff and advisers are in one state or territory, it’s sensible to choose that location’s law. It reduces friction, especially if a dispute arises.
2) Where are your customers or suppliers?
If most of your customers are in a different state, consider whether insisting on your home law is commercially realistic. For large contracts, you may negotiate to split the difference (e.g. your law applies, but disputes can be heard where the other party resides).
3) Contract type and risk profile
Some deal types (like franchising or property) may have stronger local rules or industry norms. For standard product or service sales, stability and convenience often matter most.
4) Regulatory overlays
Choosing governing law won’t remove national obligations. The Australian Consumer Law (ACL) and privacy rules can still apply, regardless of the state law you pick. If your terms might be captured by the unfair contract terms regime, it’s worth a UCT review and redraft to ensure your clauses are enforceable.
5) Consistency across your suite
Pick one law and use it across your templates. If every template picks a different law, you introduce unnecessary complexity for your team and increase your legal spend down the track.
Cross‑Border Deals: Australia Vs Overseas Governing Law
As your business grows, you may contract with overseas customers or vendors. It’s common to see contracts that nominate foreign governing law (for example, Delaware or England) and require disputes to be heard offshore.
Should you accept foreign governing law?
Be cautious. Accepting overseas law can increase uncertainty, cost and risk. You may need foreign lawyers to interpret terms, and enforcing a judgment back in Australia can be complex.
Where possible, negotiate for Australian governing law and an Australian forum. If that’s not feasible, consider compromises such as Australian law with international arbitration, or at least neutral arbitration rules with a seat you can manage.
Check your consumer and data obligations still apply
Even if a contract picks overseas law, Australian mandatory protections may still apply to your conduct in Australia. Marketing and refunds still need to align with the ACL. If your website collects personal information, you’ll also need a compliant Privacy Policy and practices consistent with the Privacy Act (choosing foreign law won’t change that).
Practical drafting ideas for cross‑border deals
- Use a short-form addendum applying Australian law to your deliverables where you can justify it.
- If you must accept foreign law on a large customer’s paper, adjust liability, IP and termination terms carefully and get local advice on enforceability.
- Record the negotiation as a Heads of Agreement first if needed, then build out the full contract with an agreed governing law once commercial terms are settled.
Drafting Tips: What To Include In Your Governing Law And Dispute Clauses
Well-drafted “boilerplate” avoids confusion later. Here’s what to cover.
Keep it clear and specific
Name the state or territory precisely (e.g. “the laws of New South Wales, Australia”). Avoid vague references like “the laws of Australia” because contract law is largely state-based.
Pair governing law with jurisdiction
Include both a governing law clause and a jurisdiction clause. If you want disputes heard in your local courts, say so. You might use “exclusive jurisdiction” (only your chosen courts) or “non-exclusive jurisdiction” (your courts are acceptable but not the only option). Consider where you and the other party are likely to be if a dispute arises.
Align with your other risk clauses
Governing law interacts with damages, indemnities and liability caps. Review these together so the package works under the chosen law. If you’re using a standard template, it’s smart to revisit your limitation of liability and indemnity positions at the same time.
Consider dispute resolution steps
Many small businesses benefit from a tiered process before anyone files in court. A simple structure could be: good faith negotiation between managers, then mediation, then litigation or arbitration if needed. This keeps disputes proportionate and preserves relationships where possible.
Use plain English examples
A simple governing law and jurisdiction combination might read like this:
“This Agreement is governed by the laws of Victoria, Australia. Each party irrevocably submits to the exclusive jurisdiction of the courts of Victoria and courts hearing appeals from them.”
Tailor the wording to your business and risk profile, and consider how it will operate across your customer base.
Think about execution and variations
Good housekeeping goes a long way. If you’re contracting with companies, make sure documents are properly executed (for companies, that might be under section 127 of the Corporations Act - see more about signing under section 127). If you change governing law later, do it with a formal change mechanism such as a contract variation executed by both parties or a Deed of Variation where appropriate.
Common Pitfalls And How To Avoid Them
Here are the traps we regularly see - and how you can sidestep them.
1) Picking “the laws of Australia”
Contract interpretation on issues like implied terms, penalties and limitation periods sits largely at state or territory level. Choose a specific state or territory to avoid ambiguity.
2) Leaving jurisdiction silent
If you don’t nominate a forum, you may face a dispute in an inconvenient location. Pair governing law with a jurisdiction clause to lock in the forum you can live with.
3) Misalignment across your templates
It’s common to see a Terms of Trade template with one state’s law and a proposal or SOW template with another. Standardise your boilerplate so all documents point to the same governing law, jurisdiction and dispute process.
4) Ignoring mandatory laws
Governing law clauses don’t override mandatory legislation. The ACL (including rules on misleading or deceptive conduct and false or misleading representations) will still apply to your conduct in Australia. It’s good practice to sense-check your marketing and refund terms against basic contract principles and the ACL’s obligations, and get help if unsure.
5) Accepting overseas law without a plan
If a large customer insists on foreign governing law, weigh up the commercial upside against the legal downside. Build in caps on liability, clear IP ownership, practical termination rights, and confirm how you’d enforce your rights. If the other side’s paper includes assignment rights, understand how they work under the chosen law, or consider whether an assignment of contract approach could protect you.
6) Boilerplate that clashes with the ACL’s unfair contract terms regime
From November 2023, the unfair contract terms regime has stronger penalties and applies broadly to standard form contracts with consumers and many small businesses. Clauses about jurisdiction, indemnities and liability caps are regularly scrutinised. A targeted UCT review and redraft can help keep your terms enforceable while still protecting your business.
7) Not reflecting your sales channel
If you sell online, make sure your governing law and jurisdiction appear in your website terms at checkout and are easy for customers to access. Your Website Terms and Conditions and Customer Contract should align so you’re not sending mixed messages.
8) No process for updates
As you expand interstate or overseas, revisit your boilerplate. Put a review cadence in place and keep a clean version history so everyone is working from the current templates.
Putting It Into Practice: A Simple Roadmap
If you’re updating your templates or rolling out new ones, here’s a pragmatic workflow.
Step 1: Map your risk and reach
Where do you currently sell, and where do you plan to sell in the next 12-24 months? If you’re national but headquartered in one state, a single governing law (your home state) will often be the right balance.
Step 2: Standardise your suite
Ensure your Terms of Trade, order forms, statements of work and Customer Contract all use the same governing law and jurisdiction language. Keep the language identical to avoid drift.
Step 3: Align your other clauses
Review liability caps, indemnities, IP ownership and termination rights so they work under the chosen law. If you’re adjusting risk positions, do it holistically and document updates clearly. If you’re unsure, a short contract review can be a fast way to sanity-check your clauses.
Step 4: Plan for exceptions
Document when you’ll accept a different governing law (for example, for enterprise customers above a certain value) and what extra approvals are required. Provide a fallback clause bank and escalation path so your sales team stays empowered but within guardrails.
Step 5: Execution and version control
Make sure agreements are executed properly (for companies, consider section 127 where available). Keep a clean record of signed versions, and use formal variations for any changes rather than email edits buried in threads. If you need to change terms mid-relationship, use a proper amendment process consistent with your contract’s variation clause or a deed, as outlined in our guide to making amendments to contracts.
FAQs About Governing Law For Small Businesses
Can I choose different governing law for different products?
You can, but it adds complexity and room for error. Most small businesses are better off picking one Australian state or territory and sticking with it across all standard contracts.
What if a customer strikes out my governing law clause?
Decide how important the deal is, then negotiate. If you accept their law, consider a price adjustment to cover higher legal costs and build in stronger risk protections elsewhere (e.g. liability caps). Record the exception so your team knows it required approval.
Does governing law change basic contract formation rules?
Core concepts like offer, acceptance and consideration are similar across Australian jurisdictions, but there are differences at the margins. It’s still important to get formation basics right - see our overview of offer and acceptance for practical pointers.
Do I need to update old contracts?
If your legacy templates are inconsistent, or you’ve grown beyond your home state, it’s worth updating your boilerplate. Use a formal change process and confirm customers have notice of any updated terms before you rely on them.
Key Takeaways
- Governing law sets the rulebook for your contract, while jurisdiction sets the forum - include both for certainty.
- Picking your home state’s law often reduces cost and complexity, but plan for negotiated exceptions on large deals.
- Standardise governing law and jurisdiction across your Terms of Trade, Customer Contract and website terms to avoid conflicts.
- Mandatory rules like the ACL still apply, and the unfair contract terms regime can affect drafting - consider a UCT review if you use standard form contracts.
- If you accept foreign governing law, adjust your risk clauses and enforcement strategy accordingly, and budget for extra legal input.
- Use proper execution and variation processes, and keep your boilerplate aligned with related clauses like liability caps and indemnities.
If you’d like a consultation on reviewing or setting up governing law and jurisdiction clauses in your contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
