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Governing law refers to the body of laws that will be used to decide a given dispute. Sometimes, it is very clear which law will govern. At other times, it can be more difficult to determine which law should be used to adjudicate a given legal case.
Within many countries, separate bodies of law exist. For example, in the United States, each state has the authority and exclusive jurisdiction to make laws on certain issues, such as real property and family law governing citizens within their borders. Each state is also permitted to make and enforce its own body of contract law, within limits set by federal laws and within the limitations on power set forth in the US Constitution.
Issues can arise when parties from two different states contract or when two different states have interest in adjudicating the results of a tort law cause of action or other type of legal dispute. A similar problem can arise in the European Union, when parties from two separate members of the Union have a legal dispute. In these situations, it becomes more difficult to determine what the governing law is and which state's or jurisdiction's law should be used to settle the dispute.
In the United States, choice of law rules exist to help parties determine what governing law applies. For example, if the two parties include a "choice of law" clause or forum selection clause in a contract, this will normally be enforced. This means that if the parties specify that Delaware law will be applied to decide any dispute, the courts will listen to the parties' wishes and apply Delaware law when making a decision on how the contract should be interpreted.
If the individual parties don't specify which law applies, or if the situation arises in tort or some other area of law where the parties don't have an opportunity to specify the governing law, the court will use other choice of law rules to determine what the governing law is. These rules are designed to ensure that the jurisdiction with the greatest interest in deciding the dispute is able to apply its law. Choice of law rules have evolved under case law, or common law, rules in the United States.
This does not mean that the case must be brought in the court whose law applies. For example, just because a case must be decided under Delaware law does not mean it must be brought in Delaware Court. A court in another state, or the federal court, can hear the case, but it must decide the case using the body of law from Delaware.