Legal risks are the possibility of occurrence of events that were not originally envisaged by the parties to the transaction, a legal entity, or an entrepreneur that influence the results of operations. How to properly assess these risks? How to minimize them? We will answer these and other questions on this topic further.
Legal entity risks
First, we list all the possible risks in legal activity:
- Objective or controlled: natural, criminal, technical.
- Subjective or uncontrollable: contractual, marketing, financial, legal, political.
As we 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
We turn to paragraph 1 of Article 2 of the Civil Code of the Russian Federation. Entrepreneurship (both entrepreneurship and the creation of a company) here is defined as activities carried out at one’s own risk, as well as aimed at gaining regular income by performing work, selling goods, providing services, using various real estate and movable property.
If you start from this definition, then even doing business itself is a risky enterprise. 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.
Moreover, the majority of legal risks are here at the time of conclusion of contracts, contracts, or any transactions.
Legislative definition
What about Russian legislation? It does not contain any precise definition of legal risks. The only document that can be relied on in this matter is the recommendation letter of the Central Bank of the Russian Federation dated 30.06.2005 No. 92-T "On the organization of legal risk management and the risk of loss of business reputation in credit organizations and banking groups."
It outlines the general principles of the work of banking organizations in determining and studying the impact of legal risks both on the profitability of transactions and on the business reputation of companies. Despite the fact that the addressee of this letter is limited, most of the recommendations in it are universal. They can be applied by analogy in the conclusion of various transactions 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 impact on the perception of the organization by its customers and counterparties. This determines the likelihood of damage to the image of the company.
Moreover, paragraph 2.1 of this letter divides the entire totality of legal (legal) risks into two categories. It is internal and external. Let's consider them in more detail.
Inner group
The following are considered internal legal (legal) risks of a company:
- Inconsistency between the activities of the enterprise or organization, constituent documents, transaction practices, relevant requirements and legal norms.
- The organization of the legal departments of the company is not effective enough, there is a lack of coordination with the management team, neglect of the need to conduct a legal examination of each transaction, legislatively gross errors in concluding various types of agreements and contracts.
- Violation by the organization of the conditions of the contract signed by it. It can be either forced or intentional. For example, assuming obligations disproportionate to the real capabilities of the company.
- Insufficient attention is paid to technological improvements, the introduction of an electronic documentation circulation system, the use of various Internet resources for business correspondence, negotiations with contractors, participation in tenders and tenders.
External group
The external risks of a legal entity include the following:
- Circumstances beyond the control of the parties to the transaction. These include legislative changes and adjustments, the introduction of new or increasing existing taxes, and 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 - a phenomenon whose probability of occurrence can be, if not eliminated, then minimized to a certain level. The main organizational measures in this vein are the following:
- Determination 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 concluded, despite the attractiveness of the proposal.
- The appointment of a responsible person (or several persons with differentiation of vectors for which they are responsible), the responsibility of which will include both an assessment of legal risks and minimization of their manifestations.
- Creation of a structure for mutual information on 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 customers, partners.
- Creation of a monitoring system that monitors the activities of the legal department and other specialists directly or indirectly involved in transactions, signing contracts, etc.
- Legal risk insurance. Since they can lead to the most negative consequences. Many far-sighted organizations seek to insure themselves against the occurrence of such an insured event. The difficulty here is that it is necessary to provide for all situations where legal risks significantly affect the outcome of the activity, the general state of affairs of the organization.
Measures to minimize risks independent of companies
We continue to consider the legal category of risks of a legal entity. As for external risks that are not dependent on the company itself, the legislation proposes the following measures to minimize them:
- Regular monitoring by a legal adviser of changes in legislation.
- Accounting for the period between the adoption of a state normative act and its entry into force.
- Regular monitoring of news, media reports on the work of those government agencies that have an influence in one way or another, regulates the activities of the company.
- With a high level of likelihood of the adoption of certain regulatory measures by the state, the company must agree on the possible consequences of this before concluding a transaction with its counterparty or somehow arrange such a probability in the terms of the contract. A cardinal measure is to refuse to conclude a contract until an important legislative provision has entered into force.
- If there is a high probability of an increase in mandatory payments to the state treasury, the amount of their increase should be previously included in the transaction price.
Contract Evaluation
What other risks of a legal address related to cooperation with contractors can be? Their assessment is complicated by the fact that the organization’s accounting information is hidden from third parties, that is, it is often impossible to find out about the amount of profit, expenses, amount of equity, accounts payable / receivable of a partner.
Regarding legislation, it recommends assessing legal risks in this case as follows:
- Refer to publicly available information from registers, register, state databases on the participation of a partner in auctions and tenders, investment projects.
- To study the information of the judicial authorities on the nature, number of legal and financial claims against the counterparty, the number of cases considered, in which the partner was involved.
- Turn to the resources of the prosecutor's office, the Federal Social Security Service, the labor inspectorate. Here you can find out about the company's debt to the state budget, other contractors, its own employees, as well as get acquainted with complaints and complaints about the partner’s work, conducting inspections and other control measures in relation to him.
- To study the information presented in the media, archives of advertising campaigns of a partner. Here you can learn about the expansion of activities, changes in the range of products.
Measures to minimize internal risks
Now we will present practical advice on Russian legislation to combat domestic legal risks. They are mainly aimed at improving the qualifications of employees, encouraging employees to take a more responsible approach to their own responsibilities. These are the following items:
- Defining clear requirements for the qualifications of employees, personal and business qualities of employees.
- Timely development and communication of job descriptions to each worker, a list of duties and rights, ways of interacting with colleagues and management.
- Strict requirement from employees of strict observance of the rules of work with commercial, personal secret, professional ethics.
- Regular staff training.
- Appointment of proper material incentives for conscientious work.
Technical measures
In conclusion, a series of purely technical measures that will help reduce the level of legal risks in relation to a company:
- Unification of texts, forms of contracts concluded by the organization.
- Creation of a productive system of accounting and storage of all previously drawn up contracts and agreements.
- Analysis of the quality of the implementation of certain provisions, determining the need for concretization of any clauses of contracts.
- Creating a convenient system of internal agreement of business documents, their sight by management.
- Optimization of the load on the legal department.
- Ensuring regular access of employees to regulatory documents, relevant legal literature, information on judicial practice, which may be necessary, is useful in the performance of their official duties.
Legal (legal) risks are only one of the categories of risks that an individual entrepreneur or 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.