Legal risks: basic concepts, types, categories, insurance

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Legal risks - this is the possibility of the occurrence of events that were not originally foreseen by the parties to the transaction, a legal entity, an entrepreneur, affecting the results of activities. How to properly assess such risks? How to minimize them? We will answer these and other questions on this topic below.

Legal entity risks

First, let's list all the possible risks in legal activity:

• Objective or managed: natural, criminal, technical.
• Subjective or unmanageable: contractual, marketing, financial, legal, political.

As we can see, the subject of our conversation is only one category among the risks that both a legal entity and an individual entrepreneur may face.

Sources of the concept

Let's turn to paragraph 1 of Article 2 of the Civil Code of the Russian Federation. Entrepreneurship (both sole proprietorship and company formation) is defined here as an activity carried out at one's own risk, as well as aimed at acquiring a regular income by performingworks, sale of goods, provision of services, use of various property, immovable and movable.

Based on this definition, even doing business itself is a risky venture. First of all, due to the fact that a businessman can only assume the degree of profitability of his occupation, the success of continuing the business.

At the same time, most of the legal risks here are at the time of the conclusion of agreements, contracts, any transactions.

Legislative definition

What about the Russian legislation? It does not contain any precise definition of legal risks. The only document that can be relied upon in this matter is the recommendation letter of the Central Bank of the Russian Federation dated 2005-30-06 No. 92-T "On the organization of management of legal risk and the risk of loss of business reputation in credit institutions and banking groups."

It outlines the general principles of the work of banking organizations to determine, study the impact of legal risks both on the profitability of transactions and on the business reputation of companies. Despite the fact that the circle of addressees of this letter is limited, most of the recommendations in it are universal. They can be applied by analogy when concluding various transactions also by non-financial institutions and enterprises.

Definition

So, paragraph 1.1 of the previously mentioned letter of recommendation No. 92-T calls the legal risks of the organization the likelihood of losses or any negative impacton the perception of the organization by its customers and contractors. This determines the likelihood of damage to the image of this company.

At the same time, paragraph 2.1 of this letter divides the entire set of legal (legal) risks into two categories. These are internal and external. Consider them in more detail.

Inner group

Internal legal (legal) risks of the company are the following:

• Inconsistency of the activities of an enterprise or organization, constituent documents, practices of concluding transactions with current requirements and norms of legislation.
• Insufficiently effective organization of the activities of the company's legal departments, lack of proper coordination with the management team, neglect of the need for legal expertise of each transaction, legally gross errors in the conclusion of various kinds of agreements and contracts.
• Violation by the organization of the terms of the contract it signed. It can be both forced and intentional. For example, taking on obligations that are disproportionate to the real capabilities of the company.
• Insufficient attention paid to technological improvements, the introduction of an electronic document circulation system, the use of various Internet resources for business correspondence, negotiations with counterparties, participation in competitions and tenders.

Outer group

The external risk category of a legal entity includes the following:

• Circumstances beyond the control of the parties to the transaction. To theminclude legislative changes and adjustments, the introduction of new or increase in existing taxes, the tightening of requirements for the activities carried out by the company.
• Both forced and intentional default by counterparties.

Minimization measures

Risks of a legal entity is a phenomenon, the probability of occurrence of which can be, if not eliminated, then minimized to a certain level. The main organizational measures in this vein are the following:

• Identification of the main and secondary risk factors when concluding transactions, taking into account the main vector of the company's activity.
• Designation of risk tolerance criteria when signing a contract. Determining the conditions under which it can never be negotiated, despite the attractiveness of the offer.
• Appointment of a responsible person (or several persons with a distinction between the vectors for which they are responsible), whose responsibility will include both assessing legal risks and minimizing their manifestations.
• Creating a structure for mutual information about possible risks between the management of the organization and its legal department, other interested departments.
• Determination of the order in which legal risks are separated from risks of a different nature - production, credit, financial, etc.
• Creating a monitoring system, assessing the level of risks in relation to both the organization itself and its clients, partners.
• Creationa controlling system that monitors the activities of the legal department and other specialists directly or indirectly involved in the conclusion of transactions, the signing of contracts, etc.
• Insurance of legal risks. Since they can lead to the most negative consequences. Many far-sighted organizations seek to insure themselves against the onset of such an insured event. The difficulty here is that it is necessary to foresee all situations where legal risks significantly affect the outcome of the activity, the general state of affairs of the organization.

Measures to minimize risks beyond the control of companies

We continue to consider the legal category of risks of a legal entity. As for external risks that do not depend on the company itself, the legislation proposes the following measures to minimize them:

• Regular monitoring by the legal adviser of changes in legislation.
• Recording in its activities the period between the adoption of the state normative act and its entry into force.
• Regular monitoring of news, media reports on the work of those state bodies that in one way or another influence and regulate the company's activities.
• When there is a high level of likelihood that certain regulatory actions will be taken by the government, the company must agree on the possible consequences of this before entering into a transaction with its counterparty, or somehow formalize such a possibility in the terms of the contract. The cardinal measure is to refuse to conclude a contract untilan important legislative provision will not come into force.
• If there is a high probability of an increase in mandatory payments to the state treasury, the amount of their increase must first be included in the transaction price.

Evaluation at the conclusion of contracts

What other risks of a legal address can be associated with cooperation with counterparties? Their assessment is complicated by the fact that the accounting information of the organization is hidden from third parties, that is, it is often impossible to find out about the amount of profit, expenses, equity, accounts payable / receivable of a partner.

As far as legislation is concerned, it recommends assessing legal risks in this case as follows:

• Refer to publicly available information from registers, Unified State Register of Legal Entities, state databases on partner participation in auctions and tenders, investment projects.
• Study the information of the judicial authorities on the nature, number of legal and financial claims against the counterparty, the number of pending cases in which the partner appeared.
• Refer to the resources of the prosecutor's office, the FSSP, the labor inspectorate. Here you can find out if the company has debts to the state budget, other counterparties, its own employees, as well as get acquainted with claims and complaints about the work of a partner, conducting inspections and other control measures against him.
• Study the information provided in the media, the archives of the partner's advertising campaigns. Here you can find out about the expansion of activities, changespresented range.

Measures to minimize internal risks

Now let's present the practical advice of Russian legislation on combating domestic legal risks. Basically, they are aimed at improving the skills of employees, encouraging employees to take a more responsible approach to their own duties. These are the following items:

• Definition of clear requirements for the qualifications of employees, personal and business qualities of employees.
• Timely development and communication to each of the workers of his job descriptions, a list of duties and rights, ways of interacting with colleagues and management.
• Strict requirement from employees to strictly comply with the rules of work with commercial, personal secrets, professional ethics.
• Regular referral of employees for advanced training.
• Assignment of proper financial incentives for conscientious work.

Technical measures

In conclusion, a number of purely technical measures that will help reduce the level of legal risks in relation to any company:

• Unification of texts, forms of contracts concluded by the organization.
• Create a productive system for recording and storing all previously drawn up contracts and agreements.
• Analysis of the quality of execution of certain provisions, determining the need to specify any clauses of the contracts.
• Creating a convenient internal agreement systembusiness documents, their approval by management.
• Optimizing the load on the legal department.
• Providing employees with regular access to regulatory documents, up-to-date legal literature, information on judicial practice, which may be necessary, is useful in the performance of their official duties.

Legal (legal) risks are just one of the categories of risks that an individual entrepreneur or an organization (legal entity) may face. They are divided into internal and external, depending on the activities of the company and on insurmountable circumstances. The legislation of the Russian Federation offers effective measures to neutralize and minimize them, which were presented in the article.