Glossary · legal

Choice of law

Also called governing law clause, governing law, applicable law clause.

The clause naming which state's law interprets the agreement, distinct from the forum clause that names where you have to litigate — and, in this market, chosen by the funder for reasons that are not neutral.

Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.

What it means

One sentence, usually paired with another that names a court. They do different jobs and are constantly conflated. Choice of law decides which rules apply to the contract. Jurisdiction and venue decide where you must appear. You can be sued in your home state under another state's law, or dragged across the country under your own.

Why it is contested in commercial finance

The things that vary state to state are exactly the things that decide a dispute: usury ceilings and whether they reach commercial transactions, licensing requirements for lenders and brokers, the enforceability of confessions of judgment, the availability and limits of attorney's fee awards, the limitations period, and the treatment of liquidated damages. A funder selects a state whose law suits its documents, and the market has concentrated on a small number of them.

Whether the choice sticks

Courts generally honour a governing law clause where the chosen state bears a reasonable relationship to the transaction and applying its law would not offend a fundamental public policy of a state with a materially greater interest. That is a real test with real exceptions, and outcomes differ by forum and by facts. New York has legislated away half of it for larger deals: General Obligations Law § 5-1401 lets the parties to a contract covering in the aggregate not less than $250,000 choose New York law "whether or not such contract, agreement or undertaking bears a reasonable relation to this state", excluding labour and personal services contracts and personal, family or household transactions. Do not assume the clause is decorative, and do not assume it is absolute.

What the clause cannot do

Some statutes attach by their own terms regardless of what the contract picks. New York's Commercial Finance Disclosure Law is article 8 of the Financial Services Law, and § 802 states its exemptions as a closed list: financial institutions, certain technology service providers to exempt entities, Farm Credit Act lenders, financing secured by real property, UCC article 2-A leases, a provider making no more than five commercial financing transactions in this state in a twelve-month period, an individual transaction over $2,500,000, and certain vehicle dealer and rental fleet transactions. A choice of another state's law is not on that list. California's parallel regime — SB 1235, enacted in 2018 and given effect by DFPI disclosure regulations that took effect on 9 December 2022 — is a separate statute with its own scope provisions, and those are what decide whether it applies. Read the statute and its current regulations rather than the governing law clause.

Where this one catches people

Read the governing law clause together with the forum clause, the arbitration clause, the class action waiver and the jury waiver, because it is the combination that determines your practical position and no single one of them tells you much.

A clause naming a distant state's law and that state's courts converts a 30,000 dispute into a matter that costs more to contest than to concede. That is frequently the design. Before you sign, work out what it would actually cost you to bring a claim under this agreement — not whether you would win, but whether you could afford to start.

The mirror-image error is assuming a favourable governing law imports that state's protections for you. It does not import disclosure rights, which attach on their own terms, and it does not necessarily import a usury ceiling to a transaction the chosen state treats as exempt.

Where you will meet this term

Merchant Cash Advance Working Capital Term Loan Equipment Financing Invoice Financing Revenue-Based Financing

Read next

Arbitration clauseA contract term sending disputes to a private arbitrator instead of a court, usually alongside a jury waiver … Attorneys' fees clauseThe term making the business pay the funder's legal and collection costs on default, often as a fixed percent… Class action waiverThe term giving up your right to bring or join a class or collective action, so any dispute proceeds only on … Commercial financing disclosure law (CFDL)State statutes requiring standardized cost disclosures on small commercial financing, including cash advances… Confession of judgment (COJ)A pre-signed admission of liability that lets a funder obtain a court judgment on default without suing you, … Jurisdiction clauseThe provision fixing which state's law governs the contract and where any dispute must be brought — the claus… Statute of limitations (SOL)The deadline for filing suit on a claim, running from when the claim accrued — after which even an obviously … UsuryCharging interest above what state law permits on a loan; the doctrine applies to loans, which is why the loa… Usury capThe maximum interest rate a state permits on a loan, set by statute, differing by state, by type of lender an… Waiver of jury trialA clause in which both parties give up the right to a jury in any dispute arising from the agreement, leaving…

Sources and checks

Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.

  1. For contracts of at least $250,000 New York law may be chosen whether or not the contract bears any reasonable relation to New York definition
    Parties to a contract "covering in the aggregate not less than two hundred fifty thousand dollars" may choose New York law "whether or not such contract, agreement or undertaking bears a reasonable relation to this state."
    New York State Senate — New York General Obligations Law § 5-1401 - Choice of law corrected Checked 10 Sep 2026 by Find Me Funders research desk
  2. The New York Commercial Finance Disclosure Law’s exemptions are a closed statutory list, and a choice of another state’s law is not one of them definition
    "This article shall not apply to ... (a) a financial institution ... (d) a commercial financing transaction secured by real property ... (f) any person or provider who makes no more than five commercial financing transactions in this state in a twelve-month period".
    New York State Senate — New York Financial Services Law § 802 - Exemptions corrected Checked 10 Sep 2026 by Find Me Funders research desk
  3. New York’s commercial financing disclosure regime sits in article 8 of the Financial Services Law definition
    Article 8 is headed "COMMERCIAL FINANCING" and runs from § 801 Definitions through § 812 Penalties.
    New York State Senate — New York Financial Services Law, Article 8 - Commercial Financing Verified against source Checked 10 Sep 2026 by Find Me Funders research desk
  4. California’s parallel regime is SB 1235, enacted in 2018 and given effect by DFPI regulations effective 9 December 2022 definition
    "SB 1235 (Glazer)" enacted September 30, 2018; the regulations became effective "Dec. 9 of this year" (2022).
    California Department of Financial Protection and Innovation — DFPI’s Commercial Financing Disclosure Regulations Approved to Become… corrected Checked 10 Sep 2026 by Find Me Funders research desk

Choice of law — common questions

What does choice of law mean?

The clause naming which state's law interprets the agreement, distinct from the forum clause that names where you have to litigate — and, in this market, chosen by the funder for reasons that are not neutral.

Where does choice of law catch people out?

Read the governing law clause together with the forum clause, the arbitration clause, the class action waiver and the jury waiver, because it is the combination that determines your practical position and no single one of them tells you much.

Is choice of law the same as an interest rate?

Choice of law is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does choice of law apply to?

Merchant Cash Advance, Working Capital, Term Loan, Equipment Financing, Invoice Financing, Revenue-Based Financing.

Is there a worked example of choice of law?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside choice of law?

Arbitration clause, Attorneys' fees clause, Class action waiver, Commercial financing disclosure law, Confession of judgment.

Has this definition been checked?

Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.