diff --git a/agent/system_prompt.py b/agent/system_prompt.py
index 4a61a2ee0..559b66f48 100644
--- a/agent/system_prompt.py
+++ b/agent/system_prompt.py
@@ -24,7 +24,6 @@ Pure helpers that read the agent's state.  AIAgent keeps thin forwarders.
 from __future__ import annotations
 
 import json
-import os
 from typing import Any, Dict, List, Optional
 
 from agent.prompt_builder import (
@@ -41,6 +40,7 @@ from agent.prompt_builder import (
     TOOL_USE_ENFORCEMENT_GUIDANCE,
     TOOL_USE_ENFORCEMENT_MODELS,
 )
+from agent.runtime_cwd import resolve_context_cwd
 
 
 def _ra():
@@ -288,13 +288,12 @@ def build_system_prompt_parts(agent: Any, system_message: Optional[str] = None)
         context_parts.append(system_message)
 
     if not agent.skip_context_files:
-        # Use TERMINAL_CWD for context file discovery when set (gateway
-        # mode).  The gateway process runs from the hermes-agent install
-        # dir, so os.getcwd() would pick up the repo's AGENTS.md and
-        # other dev files — inflating token usage by ~10k for no benefit.
-        _context_cwd = os.getenv("TERMINAL_CWD") or None
+        # Prefer the configured TERMINAL_CWD (gateway mode). When unset (local
+        # CLI), None lets build_context_files_prompt fall back to the launch
+        # dir — the user's real cwd there, but the install dir for the gateway
+        # daemon, which is why the gateway sets TERMINAL_CWD.
         context_files_prompt = _r.build_context_files_prompt(
-            cwd=_context_cwd, skip_soul=_soul_loaded)
+            cwd=resolve_context_cwd(), skip_soul=_soul_loaded)
         if context_files_prompt:
             context_parts.append(context_files_prompt)
 
diff --git a/tests/agent/test_system_prompt.py b/tests/agent/test_system_prompt.py
new file mode 100644
index 000000000..75bf28b54
--- /dev/null
+++ b/tests/agent/test_system_prompt.py
@@ -0,0 +1,57 @@
+"""Tests for agent/system_prompt.py — context-file cwd wiring."""
+
+from types import SimpleNamespace
+from unittest.mock import patch
+
+from agent.system_prompt import build_system_prompt_parts
+
+
+def _make_agent(**overrides):
+    base = dict(
+        load_soul_identity=False,
+        skip_context_files=False,
+        valid_tool_names=[],
+        _task_completion_guidance=False,
+        _tool_use_enforcement=False,
+        _environment_probe=False,
+        _kanban_worker_guidance="",
+        _memory_store=None,
+        _memory_manager=None,
+        model="",
+        provider="",
+        platform="",
+        pass_session_id=False,
+        session_id="",
+    )
+    base.update(overrides)
+    return SimpleNamespace(**base)
+
+
+def _captured_context_cwd(agent):
+    """The cwd build_system_prompt_parts hands to build_context_files_prompt."""
+    captured = {}
+
+    def fake_context_files(cwd=None, skip_soul=False):
+        captured["cwd"] = cwd
+        return ""
+
+    with (
+        patch("run_agent.load_soul_md", return_value=""),
+        patch("run_agent.build_nous_subscription_prompt", return_value=""),
+        patch("run_agent.build_environment_hints", return_value=""),
+        patch("run_agent.build_context_files_prompt", side_effect=fake_context_files),
+    ):
+        build_system_prompt_parts(agent)
+    return captured["cwd"]
+
+
+class TestContextFileCwd:
+    def test_none_when_terminal_cwd_unset(self, monkeypatch):
+        # Unset → None, so discovery falls back to the launch dir inside
+        # build_context_files_prompt (the local-CLI #19242 contract).
+        monkeypatch.delenv("TERMINAL_CWD", raising=False)
+        assert _captured_context_cwd(_make_agent()) is None
+
+    def test_configured_dir_when_terminal_cwd_set(self, monkeypatch, tmp_path):
+        monkeypatch.setenv("TERMINAL_CWD", str(tmp_path))
+        assert _captured_context_cwd(_make_agent()) == tmp_path