Choice of Law Clauses in California Business Contracts

Last updated: November 2026

A choice of law clause tells a court which state's law governs the contract. California courts usually enforce the clause when the chosen state has a substantial relationship to the parties or the deal, unless applying that law would violate a fundamental California policy on an issue where California has the greater interest. Statutes carve out employees, non-competes, and some sale-of-goods contracts. Kolmogorov Law, P.C. litigates these questions for businesses in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a contract dispute where the other side says another state's law applies.

What a choice of law clause does, and what it does not

A governing law clause picks the substantive rules: how the contract is interpreted, what counts as breach, which defenses exist, what damages are recoverable. It does not pick the courthouse. That is the job of a forum selection clause, and the two are often confused. A contract can be governed by Delaware law and litigated in Orange County, and many are.

The default rule when the contract is silent

Without a clause, a contract is interpreted according to the law and usage of the place where it is to be performed, or, if no place of performance is indicated, the place where it was made. (Civ. Code, § 1646.) For a deal with an out-of-state supplier shipping into California, that can be the first thing the parties fight about.

How California courts decide whether to enforce the clause

The California Supreme Court adopted the Restatement approach in a case involving a Hong Kong choice of law clause. The court first asks whether the chosen state has a substantial relationship to the parties or their transaction, or whether there is any other reasonable basis for the choice. If neither, the clause is not enforced. If either is met, the court asks whether the chosen law is contrary to a fundamental policy of California. If there is no conflict, the clause is enforced. If there is, the court asks whether California has a materially greater interest than the chosen state in the particular issue, and if so, the clause gives way. (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-466.)

A party's state of incorporation or principal place of business is enough for a substantial relationship. The clause fails most often on the fundamental policy step, and only for specific issues rather than the whole contract.

The same case settled a scope question. When sophisticated commercial parties agree that the contract is "governed by" a state's law, the clause covers all causes of action arising from or related to the contract. That includes tort claims, such as breach of fiduciary duty, that emanate from the relationship the contract created. (Nedlloyd, at pp. 468-469.) That matters when a plaintiff pleads fraud or interference alongside breach of contract to escape the chosen law.

Statutes that override the clause

California has decided some questions by statute, and the Nedlloyd analysis does not apply to them.

Employees. An employer may not require an employee who primarily resides and works in California to agree, as a condition of employment, to a provision stripping the substantive protection of California law from a controversy arising in California. (Lab. Code, § 925, subd. (a).) The provision is voidable by the employee. (Lab. Code, § 925, subd. (b).) There is an exception for employees individually represented by counsel in negotiating the clause. (Lab. Code, § 925, subd. (e).)

Non-competes. A contract that is void under California's non-compete chapter is unenforceable regardless of where and when it was signed. An employer may not attempt to enforce it even if the contract was signed and the employment maintained outside California. (Bus. & Prof. Code, § 16600.5, subds. (a), (b).) A Delaware choice of law clause does not save a non-compete against a California worker. Our non-compete page covers the 2024 changes.

Sales of goods. Under the Commercial Code, when a transaction bears a reasonable relation to California and to another state, the parties may choose either state's law. (Com. Code, § 1301, subd. (a).)

Large transactions choosing California. For contracts relating to a transaction of at least $250,000, the parties may choose California law whether or not the deal bears a reasonable relation to California, except for labor or personal services contracts and consumer transactions. (Civ. Code, § 1646.5.)

How these disputes come up for business owners

A California marketing firm signs a master services agreement with a client headquartered in New York, governed by New York law. The client stops paying and the firm sues in Orange County. The client argues that New York's rules on consequential damages and attorney fees apply. They probably do.

A franchisee in Los Angeles signs an agreement governed by the franchisor's home state law and containing a non-compete. After termination, the franchisor seeks to enforce the non-compete under that state's law. California's statute controls the non-compete regardless of the clause.

A software vendor's online terms choose Washington law and disclaim implied warranties in a way Washington permits. A California business customer sues under California's Unfair Competition Law. The vendor argues the choice of law clause reaches the UCL claim.

What we do, and where these cases are heard

We read the clause for scope, run the Nedlloyd steps for each contested issue, and identify whether a statutory override applies. For a client who benefits from the chosen law, we move early to establish it. For a client who needs California law, we identify the specific issue where California's policy is fundamental and its interest greater, rather than attacking the clause as a whole.

Governing law questions arise in the Superior Court, in Orange County usually at the Central Justice Center in Santa Ana and in Los Angeles at the Stanley Mosk Courthouse. Because these contracts usually involve an out-of-state party, many are heard in the Central District of California on diversity jurisdiction, and some begin with a motion to quash over personal jurisdiction. Contracts with foreign parties raise the further questions covered on our international disputes page.

What to bring to the first meeting

Bring the signed contract and any amendments, prior drafts if you have them, and the emails exchanged when the governing law and forum clauses were negotiated. Add a summary of where each party is organized, where it operates, where the work was performed, and where the money was paid.

Frequently asked questions

What is a choice of law clause?

It is a contract term stating which state's or country's law governs the agreement. It controls interpretation, breach, defenses, and remedies. It does not by itself control where the lawsuit is filed; that requires a separate forum selection clause.

Which state's law applies to a contract with no choice of law clause?

In California, the law of the place where the contract is to be performed, or, if no place of performance is indicated, the law of the place where it was made. (Civ. Code, § 1646.) Where performance spans several states, courts apply a broader interest analysis.

Will a California court enforce a Delaware or New York choice of law clause?

Usually, if the chosen state has a substantial relationship to a party or the transaction and applying its law would not violate a fundamental California policy on an issue where California has a materially greater interest. (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-466.) Clauses most often fail on specific issues, such as non-competes or employee rights, rather than entirely.

Can an employer use a choice of law clause to avoid California employment law?

Generally not for employees who primarily live and work in California. Labor Code section 925 makes such a clause voidable by the employee when it was required as a condition of employment, unless the employee was individually represented by counsel in negotiating it. (Lab. Code, § 925, subds. (a), (b), (e).)

Does a choice of law clause cover fraud and other tort claims?

Often, yes. When commercial parties agree that the contract is "governed by" a state's law, California reads the clause to reach all claims arising from or related to the contract, including related torts. (Nedlloyd, at pp. 468-469.) Narrower wording can produce a narrower result, so the exact words matter.

Talk to a California breach of contract attorney

If a contract dispute turns on which state's law applies, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the clause, the parties' connections to each state, and the court.