Governing Law Clauses Explained (India)

A governing law clause says which country's, or which Indian state's, substantive law will be used to interpret the contract, decide what a breach means, and work out damages. It is not the same as a jurisdiction clause (which court can hear a dispute) and it is not the same as an arbitration seat (where an arbitration physically sits and whose procedural law runs the hearing). The one thing most people get wrong: they treat "governing law" and "jurisdiction" as one clause, write "This Agreement is governed by the laws of India and the courts of Delhi" as if that settles everything, and never notice when the two point in genuinely different directions, or when a foreign law is picked for a deal that has no real connection to that country. This guide (published by Adira, which makes contract review and CLM software, so we have a commercial stake in you understanding contracts well, but this explainer stands on its own) walks through what a governing law clause actually controls, what Indian courts have said about Indian parties choosing foreign law, and what to check before you sign.

Plain meaning

A governing law clause is a rulebook selector. It tells a court or arbitral tribunal: when you have to decide whether a term was breached, whether a penalty clause is enforceable, how damages are calculated, or whether the contract was validly formed at all, use this legal system's substantive law to answer that question. "Substantive law" is the key word. It covers the rules that decide who wins on the merits, not which building the hearing happens in or which court has the power to hear the case.

Most contracts between Indian parties simply say "governed by the laws of India," and that is usually right and uncontroversial. The clause gets interesting, and occasionally dangerous, in three situations: cross-border deals where each side wants its own law, deals where a foreign law is chosen for reasons unrelated to the actual transaction, and contracts where the governing law clause and the jurisdiction or arbitration clause point at different, unrelated legal systems without anyone noticing.

Who it protects and what triggers it

A governing law clause does not protect one party over another the way an indemnity or a limitation of liability clause does. It decides the playing field before anyone knows who will need protecting. A foreign vendor selling into India often prefers its home law because its legal team already knows it. An Indian buyer usually prefers Indian law, partly for the same reason, and partly because suing under a law an Indian court readily applies is cheaper than importing expert evidence on a foreign law.

The clause starts to matter the moment there is an actual dispute about interpretation: was this a material breach, is this liquidated damages clause a penalty, was consent obtained by misrepresentation, did force majeure excuse performance. Until then it sits quietly. Once a dispute exists, the governing law clause decides which country's contract law the arbitrator or judge reaches for.

What to look for

Four things decide whether a governing law clause is straightforward or a hidden problem.

1. Does it name a specific legal system, not a vague region? "Governed by the laws of India" is precise. "Governed by applicable law" is not, and invites a fight later over what that even means.
2. Does the chosen law have a real connection to the deal? A genuine connection means where the parties are incorporated, where the contract is performed, where the subject matter (goods, land, IP) sits, or where payment flows. A foreign law with none of these, chosen between two Indian companies for a wholly Indian transaction, is the single biggest red flag in this clause.
3. Does it match the jurisdiction and arbitration clauses, or at least not contradict them? Governing law, jurisdiction (which court can hear a dispute), and arbitration seat (which country's procedural law and courts supervise an arbitration) are three separate choices, often aligned deliberately. When they point at three unrelated countries with no explanation, that is usually a drafting accident, not a strategy.
4. Is the clause silent altogether? A contract with no governing law clause does not become lawless. A court or tribunal applies private international law rules to work out the "proper law of the contract," usually the law with the closest real connection to the transaction, which is slower and more expensive to litigate than simply saying so upfront.

The Indian position

The Indian Contract Act, 1872 does not contain a section titled "governing law." Indian law instead relies on the general contract law principle of party autonomy, parties are free to choose the law that governs their contract, read together with Section 23 of the Act, which limits what any contract term can lawfully do. Section 23 says:

"The consideration or object of an agreement is lawful, unless it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void." Source: Section 23, Indian Contract Act, 1872

This is the hook Indian courts have used to police governing law choices that look like an attempt to dodge Indian law rather than a genuine commercial choice. It is also worth reading Section 28, which separately deals with clauses that try to restrict a party's right to approach ordinary courts at all:

"Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals... is void to that extent." Source: Section 28, Indian Contract Act, 1872

Section 28 is about jurisdiction and forum, not governing law, and it is exactly why the two clauses need to be read separately. A jurisdiction clause can be struck down or narrowed under Section 28 in ways a governing law clause cannot, because they are answering different questions.

For two genuinely Indian parties (both incorporated in India, contracting for performance in India), the safer default reading is that Indian substantive law should govern. Picking a foreign law with no real connection to the deal risks being treated as an attempt to escape mandatory Indian rules, which Section 23's "opposed to public policy" limb can reach. This is not a blanket rule with one clean citation; it rests on the general policy against contracting out of the law that would otherwise apply to a wholly domestic transaction. Where a contract has a real foreign element, a party genuinely based abroad, performance partly overseas, assets or IP outside India, a foreign governing law choice sits on much firmer ground.

A named Indian case: NTPC v Singer Company

The clearest and most cited Supreme Court authority on governing law is National Thermal Power Corporation v The Singer Company ((1992) 3 SCC 551; AIR 1993 SC 998). NTPC and Singer signed a contract in New Delhi, to be performed in India, that named Indian law as the governing law and gave Delhi courts jurisdiction. The arbitration clause, however, was silent on where arbitration would sit, and the ICC fixed London as the seat. When a dispute arose, the question was whether English law (because the arbitration sat in London) or Indian law (because the contract said so) governed the arbitration agreement itself.

The Supreme Court held that the proper law of the arbitration agreement normally follows the proper law of the contract, and that where the parties have expressly chosen a law to govern their contract, that choice governs the arbitration agreement too, unless there is an unmistakable intention to the contrary. Because NTPC and Singer had expressly chosen Indian law for the contract, Indian law governed the arbitration agreement even though the hearings physically happened in London under English procedural rules. Read the full judgment on Indian Kanoon.

The lesson for a governing law clause: it does not automatically decide where an arbitration happens or which country's procedural law runs the hearing room, and where an arbitration happens does not automatically change which law governs the underlying contract or the arbitration agreement inside it. These are related but separate choices, and NTPC v Singer is the case that draws the line between them.

Worth knowing too is TDM Infrastructure Pvt Ltd v UE Development India Pvt Ltd ((2008) 14 SCC 271), where the Supreme Court observed, while deciding an unrelated question about who counts as a "foreign" party for arbitration purposes, that Indian nationals should not be permitted to derogate from Indian law, calling this part of the public policy of the country. This was said in passing (courts call this obiter), not the central holding, so treat it as a strong signal of judicial thinking rather than a standalone rule to cite alone. See the judgment on Indian Kanoon.

Being honest about the limits: the Supreme Court later held, in PASL Wind Solutions Pvt Ltd v GE Power Conversion India Pvt Ltd (2021 SCC OnLine SC 331), that two Indian companies can validly choose a foreign seat of arbitration, with the award enforceable in India as a foreign award. That case was about the arbitration seat, a procedural choice, not the substantive governing law of the contract, and the two should not be confused. A foreign arbitration seat between two Indian parties is now settled as permissible; a foreign substantive law with no real connection to a wholly domestic contract remains the more exposed choice.

Red flags

Normal	Red flag	Why it matters
Names a specific country or Indian state ("laws of India")	Says "applicable law" or is left blank	Vague or missing choice pushes the question into slower, less predictable private international law fights
Governing law, jurisdiction, and arbitration seat point to the same or clearly related country	India for law, Singapore courts for jurisdiction, London as seat, with no connecting logic	Three unrelated systems in one contract usually means nobody read the clause together, and it raises dispute costs
Foreign law chosen only where a party, the subject matter, or performance genuinely connects to that country	Foreign law between two Indian companies for a wholly Indian deal, no foreign element at all	Risks being read as an attempt to escape Indian law under Section 23's public policy limb
States whether the arbitration agreement shares the contract's governing law	Arbitration clause is silent on its own governing law	NTPC v Singer shows this usually resolves in the contract's favour, but "usually" is not "always"
Stands on its own line, easy to find	Buried inside a long "Miscellaneous" clause with five unrelated provisions	Easy to miss during due diligence or once a dispute has already started
States both the governing law and the dispute resolution mechanism	Governing law stated, but no jurisdiction or arbitration clause at all	You know which law applies but not which forum applies it, and that gap gets litigated first

Bad clause → better clause

Bad: "This Agreement shall be governed by applicable law, and any disputes shall be resolved by the courts having jurisdiction."

What is wrong: "applicable law" names nothing, "courts having jurisdiction" could mean almost anywhere depending on who sues first, and there is no arbitration option at all.

Better: "This Agreement, and any dispute arising out of or in connection with it, shall be governed by and construed in accordance with the laws of India, without reference to its conflict of law principles. The courts at [city], India shall have exclusive jurisdiction over any dispute not resolved through arbitration under Clause [X]. Where arbitration under Clause [X] applies, the arbitration agreement itself shall also be governed by the laws of India, regardless of the seat of arbitration."

What changed and why: the law is named specifically, "conflict of law principles" is excluded so a court cannot try to apply some other country's law through the back door, jurisdiction is pinned to one named city, and the arbitration agreement's own governing law is stated expressly instead of being left to a court to infer the way it had to be worked out in NTPC v Singer.

How it interacts with related clauses

A governing law clause rarely stands alone, and reading it in isolation is how contradictions slip through.

• Jurisdiction and arbitration clauses. These decide the forum, governing law decides the rulebook that forum uses. They should be consistent, or deliberately and explicitly not, never accidentally so.
• Force majeure clauses. Whether an event excuses performance is a question of substantive interpretation, exactly what governing law controls. A force majeure clause drafted with US assumptions behaves differently once Indian law, and Indian courts' narrower reading of frustration, applies.
• Limitation of liability and indemnity clauses. Whether a liability cap is enforceable as written depends on the governing law's own rules on penalty clauses, which differ meaningfully between, say, Indian and English law.

You can flag exactly where your governing law clause, jurisdiction clause, and arbitration clause disagree, for free, by marking the document up in Weave, before you send it back for negotiation.

US and global contrast

US contracts are comfortable naming a specific US state's law even with only a thin connection to that state, because most US states apply a fairly permissive test for enforcing a chosen governing law and rarely strike it down on public policy grounds alone. Delaware and New York law are routinely chosen in contracts with no Delaware or New York party at all, simply because their commercial case law is well developed.

Indian courts take a more cautious view specifically where two Indian parties try to opt out of Indian law for a wholly domestic transaction, treating that as a potential public policy problem under Section 23 rather than a neutral commercial choice. The gap narrows once a real foreign element exists, a genuinely foreign counterparty, cross-border performance, or foreign-located assets, at which point Indian courts, like US courts, generally respect party autonomy.

FAQ

Can two Indian companies choose English law to govern a contract performed entirely in India? It is legally risky. Indian courts have signalled, including in TDM Infrastructure's observations on public policy, that Indian parties should not be able to derogate from Indian law through a foreign law choice that has no real connection to the transaction. If there is no genuine foreign element, Indian law is the safer and more defensible choice.

Is governing law the same as jurisdiction? No. Governing law decides which country's substantive contract law is used to interpret the agreement. Jurisdiction decides which court has the power to hear a dispute. A contract can validly say Indian law governs while an English court has jurisdiction, or vice versa, though most well-drafted contracts align the two deliberately.

Does the arbitration seat automatically decide the governing law? No, and this is exactly what NTPC v Singer Company settled. The proper law of the contract, if expressly chosen, generally also governs the arbitration agreement inside it, even when the arbitration itself physically sits in a different country under that country's procedural rules.

Can two Indian companies at least choose a foreign seat for arbitration, even if not a foreign governing law? Yes. PASL Wind Solutions v GE Power Conversion India Pvt Ltd confirmed that two Indian companies can validly choose a foreign arbitration seat, and the award is enforceable in India as a foreign award. That is a separate question from which substantive law governs the contract itself.

What happens if a contract has no governing law clause at all? The contract does not become lawless. A court or tribunal applies private international law principles to work out the "proper law of the contract," typically the legal system with the closest and most real connection to the transaction. This is slower and more litigation-prone than simply naming the governing law in the contract.

Is a governing law clause enough to protect me if my counterparty is based abroad? It decides the rulebook, not whether you can actually enforce a judgment or award against a foreign counterparty's assets. That depends separately on enforcement treaties, the New York Convention for arbitral awards, and where the counterparty actually holds assets, none of which the governing law clause by itself guarantees.

This guide gets you to understanding what a governing law clause does, how it differs from jurisdiction and arbitration seat, and where Indian courts have drawn cautious lines around foreign law choices between Indian parties. It does not tell you whether a specific governing law clause in your contract is enforceable, or the right commercial choice, in your situation, that depends on the full facts of your deal and is not legal advice. Talk to a lawyer before you rely on, or walk away from, a governing law clause in a live negotiation.