Business Law · Contract Review & Enforcement
Your contract says New Jersey law governs. You are in Pennsylvania. A dispute arises. Which state’s rules apply is not a simple question. Pennsylvania courts enforce choice-of-law clauses in commercial contracts under 13 Pa.C.S. § 1301 when the chosen state has a reasonable relationship to the parties or the transaction. What that means for enforceability, damages, and your rights depends on what the clause covers and what Pennsylvania’s public policy limits will and will not permit.
Most business owners assume a choice-of-law clause settles the question. It narrows it. Pennsylvania courts apply the chosen state’s law to contract interpretation and enforcement, but they apply Pennsylvania procedural rules, Pennsylvania remedies limitations, and Pennsylvania public policy exceptions that can override specific provisions even in a validly chosen foreign law. The clause controls less than it appears to.
A choice-of-law clause tells Pennsylvania courts which state’s contract rules to apply. It does not tell them to abandon Pennsylvania procedure, Pennsylvania public policy, or Pennsylvania remedies law. Those stay regardless of what the contract says.
If you are a Pennsylvania business owner operating under a contract governed by another state’s law, or if you are facing a dispute where the governing law is contested, call 412-351-4422 or schedule a consultation with Lebovitz & Lebovitz, P.A.
Pennsylvania courts apply the Restatement (Second) of Conflict of Laws to determine whether a choice-of-law clause is enforceable. A clause designating another state’s law will be honored if the chosen state has a substantial relationship to the parties or the transaction, or if there is any other reasonable basis for the parties’ choice, and if applying the chosen law does not violate a fundamental policy of Pennsylvania.
The substantial relationship test is not demanding. A contract between a Pennsylvania company and a New Jersey vendor, executed by officers located in New Jersey, or performing services in New Jersey, satisfies the test. The parties do not need to be headquartered in the chosen state. A business connection of any material kind is generally sufficient to establish the reasonable relationship that makes the clause enforceable.
What the court will not do is apply the chosen law mechanically to every question the contract raises. The enforceability of the clause is itself governed by Pennsylvania’s conflict-of-laws rules, not by the chosen state’s rules. Whether the clause covers a particular dispute — as opposed to the merits of that dispute — is also a question Pennsylvania courts decide under their own framework, not under the law the parties designated.
When a Pennsylvania court enforces a choice-of-law clause, it applies the designated state’s substantive law to the contract. Substantive law includes the rules for contract formation, interpretation, breach, and the remedies available under the contract itself. If the contract says New York law governs, a Pennsylvania court will look to New York’s contract interpretation rules, New York’s implied covenant standards, and New York’s damages principles when resolving a dispute about the contract’s meaning or the consequences of a breach.
This matters most when the chosen state’s substantive rules differ meaningfully from Pennsylvania’s. New York applies a strict plain-meaning rule to contract interpretation that limits the use of extrinsic evidence more aggressively than Pennsylvania’s approach. New Jersey’s enforceability standards for restrictive covenants differ from Pennsylvania’s. Delaware’s implied duty of good faith in commercial contracts is construed more narrowly than Pennsylvania’s. A contract party who assumed the clause was boilerplate and never investigated what the designated law actually says may be surprised by how it operates in litigation.
The chosen law also controls the statute of limitations for contract claims if the designated state’s limitations period is treated as substantive rather than procedural — which is itself a question courts resolve differently. A claim that is time-barred under New York’s six-year contract limitations period may or may not be time-barred under Pennsylvania’s four-year period depending on how the court classifies the limitations rule. That classification question is decided under Pennsylvania’s conflict-of-laws framework, not under the contract.
Pennsylvania courts apply Pennsylvania procedural law regardless of what the contract’s choice-of-law clause says. Procedural rules include pleading standards, discovery obligations, motion practice, and the mechanics of how a claim is litigated. The chosen state’s procedural rules do not travel with the substantive law into a Pennsylvania courtroom. A party who expected New York’s procedural framework because the contract designated New York law will litigate under Pennsylvania’s rules.
Pennsylvania public policy exceptions override specific substantive provisions even when the choice-of-law clause is otherwise valid. Pennsylvania has articulated public policy limits on non-compete enforceability, on limitation-of-liability clauses that eliminate remedies for gross negligence or willful misconduct, and on certain indemnification provisions that shift liability in ways Pennsylvania courts find contrary to fundamental policy. A provision that is valid under the chosen state’s law but violates one of these Pennsylvania public policy limits will not be enforced regardless of what the contract says.
The practical implication is that a contract party relying on a foreign-law provision to limit their exposure in Pennsylvania litigation may find that the provision does not travel as expected. Pennsylvania courts enforce choice-of-law clauses routinely — but they do not enforce every provision those clauses bring with them.
Non-compete agreements governed by another state’s law present some of the most litigated choice-of-law questions in Pennsylvania business courts. Pennsylvania’s enforceability standard for non-competes — requiring that the restriction be reasonably necessary to protect a legitimate business interest, reasonable in geographic scope and duration, and supported by adequate consideration — is a substantive rule. When a non-compete designates another state’s law, Pennsylvania courts must decide whether to apply that state’s standard or whether Pennsylvania’s non-compete policy rises to the level of a fundamental public policy that overrides the clause.
Courts have reached different conclusions depending on the facts. A Pennsylvania employee bound by a California-law non-compete may benefit from California’s near-total prohibition on post-employment restrictions, which Pennsylvania courts have sometimes applied as the governing substantive law. A Pennsylvania employee bound by a Delaware-law non-compete will generally find that Delaware’s enforcement standard, which is more permissive than Pennsylvania’s, applies — because Delaware’s approach does not violate Pennsylvania’s fundamental policy, it merely differs from it.
The distinction between a fundamental policy violation and a mere difference in rules is where most of the litigation happens. Pennsylvania courts have not drawn a bright line, and outcomes depend heavily on the specific restriction, the employee’s role, the industry, and the relationship between the parties. For a complete analysis of non-compete enforceability under Pennsylvania law, see our pages on non-compete agreements in Pennsylvania and how to challenge a non-compete in Pennsylvania.
Independent contractor agreements between Pennsylvania founders and multi-state employers frequently designate New Jersey, Delaware, or New York law. The choice-of-law clause affects how IP assignment provisions are interpreted and enforced. New Jersey has a statutory limitation on the enforceability of IP assignment clauses for work developed entirely on the contractor’s own time without using the employer’s resources. Delaware and New York have no equivalent statutory protection. A Pennsylvania founder operating under a New Jersey-governed agreement may have a statutory argument that a California or Delaware counterpart does not.
The analysis requires identifying what state’s law actually governs the IP assignment question, whether the chosen state’s statutory framework limits the clause, and whether Pennsylvania’s public policy provides any independent protection. For most founders, the answer is that the chosen state’s law controls the IP assignment analysis, Pennsylvania procedural rules control the litigation, and the specific language of the assignment clause determines the outcome. For a detailed analysis of how IC agreements affect startup IP ownership, see our page on independent contractor agreements and IP protection in Pennsylvania.
Pennsylvania’s public policy exception to choice-of-law enforcement is real but narrow. Courts do not apply it simply because Pennsylvania’s law would produce a different result for the party invoking it. The exception requires that the chosen state’s law violate a fundamental policy of Pennsylvania — a policy that reflects Pennsylvania’s deep-seated concerns about justice, morality, or general interests, not merely a preference for a different legal rule.
Provisions that Pennsylvania courts have found to implicate fundamental public policy include clauses that eliminate all remedies for intentional misconduct, clauses that require Pennsylvania residents to litigate in another state’s courts in ways that effectively deprive them of access to justice, and certain wage and hour provisions that conflict with Pennsylvania’s wage payment and collection laws. Provisions that courts have declined to override on public policy grounds include limitation-of-liability clauses that cap damages at contract value, indemnification provisions that shift costs between sophisticated commercial parties, and choice-of-forum clauses designating courts in states with which the transaction has a reasonable connection.
The practical test is whether the provision at issue crosses from a different rule into a fundamentally unjust result. Most commercial contract provisions do not cross that line. The public policy exception is a backstop, not a routine override mechanism for parties who prefer Pennsylvania’s rules.
A Pennsylvania business owner entering a contract with a choice-of-law clause should understand three things before signing. First, the clause is enforceable if the chosen state has any reasonable relationship to the transaction — which is almost always satisfied in multi-state commercial relationships. Second, the chosen state’s substantive law will govern contract interpretation, breach, and most remedies questions. Third, Pennsylvania procedural rules and public policy exceptions remain in effect and can override specific provisions even when the clause is valid.
Negotiating the choice-of-law clause before signing is the most effective point of intervention. If Pennsylvania law is more favorable for a specific provision — a non-compete limitation, an IP assignment carveout, a limitation-of-liability ceiling — designating Pennsylvania law in the clause is more reliable than relying on a public policy exception after a dispute arises. The exception is unpredictable. The negotiated clause is binding.
For existing contracts where the clause has already been signed, the analysis shifts to what the chosen state’s law actually says about the provisions at issue and where Pennsylvania’s rules create independent protections. That analysis is the starting point for evaluating exposure, preparing for a dispute, or advising on whether a provision can be enforced in a Pennsylvania proceeding. For contract drafting and review that addresses choice-of-law from the outset, see our page on contract drafting and review in Pennsylvania.
Pennsylvania choice-of-law analysis is governed by the Restatement (Second) of Conflict of Laws as adopted by Pennsylvania courts. Contract enforcement provisions are found at 13 Pa.C.S. § 1301. Cases are heard in the Pennsylvania Court of Common Pleas.
Frequently Asked Questions About Choice of Law in Pennsylvania Business Contracts
No. A choice-of-law clause designates which state’s substantive rules apply to the contract. It does not determine which state’s courts have jurisdiction over a dispute. Pennsylvania courts will hear a case with Pennsylvania contacts regardless of what the contract’s choice-of-law clause says. The clause affects which law the court applies, not whether the court hears the case.
Possibly, but Pennsylvania courts will evaluate whether New York’s enforceability standard violates Pennsylvania’s fundamental public policy on non-competes. If New York’s standard is more permissive than Pennsylvania’s in a way that crosses the public policy line, Pennsylvania courts may apply Pennsylvania’s standard instead. The outcome depends on the specific restriction and how aggressively the court applies the public policy exception.
Pennsylvania’s public policy exception overrides provisions that violate fundamental Pennsylvania policies — not merely provisions that differ from Pennsylvania’s rules. Courts have applied it to clauses that eliminate all remedies for intentional misconduct, certain wage provisions that conflict with Pennsylvania’s wage payment laws, and forum-selection clauses that effectively deprive Pennsylvania residents of access to justice. Most commercial contract provisions do not trigger the exception.
Yes. Delaware has no statutory limitation on IP assignment clauses equivalent to New Jersey’s or California’s. A Delaware-governed IC agreement will be interpreted under Delaware’s contract rules, which generally enforce broadly drafted assignment clauses as written. If the clause’s scope language is broad, the Delaware-governed agreement may reach startup assets more effectively than a New Jersey-governed agreement with the same language, because Delaware provides no statutory carveout.
Yes, and it is the most effective point of intervention. If Pennsylvania law provides better protection for a specific provision — a non-compete limitation, an IP assignment carveout, a damages cap — designating Pennsylvania law in the clause before signing is more reliable than relying on Pennsylvania’s public policy exception after a dispute arises. The negotiated clause is binding. The exception is unpredictable.
Pennsylvania courts apply the Restatement (Second) of Conflict of Laws to determine the governing law. For contract disputes, the court looks to the state with the most significant relationship to the transaction and the parties, considering where the contract was negotiated, where it was performed, where the parties are located, and the subject matter of the agreement. The absence of a clause does not mean Pennsylvania law automatically applies — it means the court decides based on those factors.
This page addresses choice-of-law clauses in Pennsylvania business contracts. For IC agreement and IP ownership analysis, see our page on independent contractor agreements and IP protection in Pennsylvania. For non-compete enforceability, see our pages on non-compete agreements in Pennsylvania and how to challenge a non-compete. For contract drafting and review, see contract drafting and review. For the full business law practice overview, see our Business Law practice area.
Business Law · Pittsburgh
Choice-of-law clauses in commercial contracts affect enforceability, remedies, and rights in ways most business owners do not discover until litigation. Stephen H. Lebovitz reviews cross-state contracts for Pennsylvania businesses and advises on exposure before it becomes a problem. Call 412-351-4422 or schedule a consultation.
A choice-of-law clause in a commercial contract narrows the governing law question but does not settle it. Pennsylvania courts apply the chosen state’s rules to contract interpretation while retaining Pennsylvania procedural law, remedies limits, and public policy exceptions. What the clause actually controls requires reading it against both states’ rules.
