The four main categories of legal risks are contractual risk, structural risk, regulatory risk and litigation risk. Contractual risk is perhaps the most difficult type of legal risk to predict or quantify. Legal risks may result in fines and administrative penalties, the need for monetary damages, reputational deterioration, deterioration of the bank`s market position, restriction of development opportunities, reduction of development opportunities or legal enforcement of agreements. We can subject both situations to a legal risk analysis. Costs and income foregone caused by legal uncertainty multiplied by the possibility of the individual event or the legal environment as a whole. [10] One of the most obvious legal risks in the conduct of business, which is not mentioned in the definitions above, is the risk of arrest and prosecution. Some types of risks are accepted as part of the business, others related to legal issues, such as contracts, businesses, assets, intellectual property and compliance, can have serious negative effects on a business. Without a crystal ball or a time machine, there`s not much entrepreneurs can do to protect themselves from structural legal risks other than being aware of trends and developments in their industry. A good business lawyer can help.
However, when looking at contract risk, it`s just as important to look at the contract management process to fully understand your company`s risk exposure. Poor contracting processes, such as manual errors, non-compliant conditions, and/or the inability to complete a contract on time, can put your business at risk. First, make a list of potential legal risks. Once you`ve identified it, analyze each risk to determine its likelihood of impacting your business and its severity. Legal risks may be due to deliberate negligence or inappropriate compliance behavior on the part of the organization. Often, such a risk also stems from ignorance. They may stem from a lack of complete knowledge of the rules and regulations that govern the company. Both cases can result in fines, damages and non-compliance. In addition, in extreme situations, the store may even be closed.
The risk of litigation arises when the act or omission of a person, business or organization causes damage. Such risks have a high probability of legal action. One of the main reasons why legal risk is associated with operational risk is fraud, as it is recognized as the most important category of business interruption events and is also considered a legal issue. [2] However, this does not mean that the legal risk is limited to this conceptualization. For example, there are certain types of legal risks defined by European Union (EU) law. In 2005, the European Central Bank stated that it would develop its own legal definition of risk in order to “facilitate appropriate risk assessment and management and ensure a consistent approach among EU credit institutions”. [3] As mentioned above, any risk can have legal implications, typical legal risks that fall within the purview of the legal department include: In many cases, companies go bankrupt if they are unable to pay penalties. If a company tries to intentionally embezzle funds, it risks being discovered and potential whistleblowers. Not to mention the regulatory bodies that exist to capture violations. These risks certainly overlap.
Does an infringement claim represent a contractual risk or a litigation risk? They also overlap with other types of risks, which are often outside the lawyer`s jurisdiction. Is the risk that a loan agreement will be unenforceable against a borrower a contractual risk or a credit risk? Legal risk is the likelihood of financial loss or loss of reputation resulting from a lack of knowledge (or misunderstandings) about how the law will be applied to your business, or working with reckless indifference to the law and its enforcement. For example, some federal labour laws depend on the type of employer, the number of employees in the organization, and the type of claim claimed. In addition, each of the different laws may have its own limitation period, so there are time limits. You should review federal and state policies for each type of claim to protect your business. Compliance risks are the risks related to the various compliance risks to which a company is subject. This correspondence may be related to internal policies and practices. These may include policies and legislation external to government and other legal bodies. Companies have several options when choosing a legal and governance structure for the organization that sets the tone and provides a foundation for processes related to taxation, liability, documentation requirements, etc. and how management and operational decisions should be made. Large companies can create their own predictive mathematical models based on their own experience and data to assess risk.
Small businesses usually can`t do that. They work hard to ensure that your business is profitable and maintains an excellent reputation.