Legal Risks

Risk is anything that causes the outcome of an event to be uncertain and adverse. Legal risks are those risks that a business organization faces that pertain to legal matters. This type of risk is generally the result of non-compliance with laws, rules, and regulations of the government and other statutory bodies that control businesses. Various matters that can result in legal risk are business contracts and agreements, assets and related litigation, matters with regards to intellectual property rights, patents, copyrights violations, etc. Legal risk can cause both monetary and non-monetary losses to a business. Monetary losses include loss of business due to cancellation of orders or payment of damages to outside third parties. Non-monetary losses include loss of reputation, goodwill, or damage to the brand value of the business.

Legal risks may be a result of willful negligence or inappropriate compliance behavior on the part of the organization. Also, many times such risk arises out of ignorance. They may arise out of a lack of complete knowledge of the rules and regulations that govern the business. Both cases can result in fines, damages, and non-compliance cases. Also, it may even result in the closure of the business in extreme situations.

These are the risks that arise out of regulations and laws that govern a business organization or the market in which it operates. Every country and the government lays down certain laws and regulations for the proper operations of the businesses. And all the businesses have to comply with those rules and regulations of the land. Moreover, any Non-compliance can have serious consequences for any organization. For example, a business can face strict penalties and even closure in case of non-compliance with regulations with regard to taxation.

Risks with regards to contracts

Businesses have to enter into contracts almost on daily basis. Hence, a business organization faces contractual risk on a daily basis. These risks pertain to its contractual obligations with the third parties. A business can face legal risks and hurdles in case of non-fulfillment of these very contracts. Failure to deliver goods and services within the agreed deadlines as per the contract is a contractual risk. Also, failure to deliver goods and services completely, deficiency in the provision of service, quality issues, etc. are all contractual risks that a business faces.

Non-contractual risks

There are risks that can arise for a business even without being a part of any contract with a third party. A competitor may infringe an organization’s patents and copyrights, or launch a similar product like the one a company is offering. The situation can be the opposite too. Other companies can file a lawsuit against a company. This can be for matters such as trademarks, patents, and copyright infringement.

Also, a company may face cases and lawsuits for harm or loss caused to a consumer. This may be due to a faulty product, or a damaged product. For example, many times cosmetic companies face lawsuits by a consumer for harm caused by the company’s cosmetic products. The harm may be totally unintentional and just a one-off case out of millions of products sold. It may still cause a significant loss to the company. It may have to pay a huge compensation amount. Also, it may lead to a loss of reputation and brand image.

Compliance risk

Compliance risks are those risks that pertain to the various compliances that a business is subject to. These compliances may be with regards to its internal policies and practices. It may be regarding external policies and statutes of the government and other statutory bodies.

For example, a business has to necessarily comply with the filing of returns, income and expenditure statements, balance sheets, etc. Before filing the entity may need to get their books of accounts audited too.  Non-compliance may result in the levy of penalties. It may also result in legal action against the company that can cause heavy losses to it.   

Risk of disputes

A business faces regular disruptions due to multiple disputes. These may be with customers, employees, or other stakeholders. It should deal cautiously with such disputes. Mishandling can result in the filing of cases and litigations by the aggrieved party. This can pose risk to a business and cause undue loss to it in terms of wastage of time to deal with such litigations. Also, the expense the business will incur to fight such cases can be very heavy.

Legal Risks

Corporate governance

The legal department in a business organization should ensure strong and ethical corporate governance within the organization. It should make sure that the business conducts ethical and legal transactions and practices that reduce the legal risks to the minimum.

The management should ensure that there is a proper system in place for day-to-day activities like consumer dealing, grievances handling, taxation, and statutory compliances, efficient and active paperwork handling and documentation, etc.

After putting a proper structure in place, threats that can pose a legal risk in the organization need to be identified. Hence, instances and loopholes that may allow fraud, thefts, unlawful and unethical activities need to be checked to the best possible extent. Measures like internal audits and controls, awareness programs, etc. can help to keep a check on such activities.

Assets

A business needs to protect its tangible and intangible assets from any damage, thefts, wastages, and breakdowns. It should ensure no harm is caused by its assets to any person, employee, agency or institution both internally and externally. This will help to keep any possibility of legal risk by way of claims to damages, penalties, legal suits, etc. to the minimum.

Regulations and controls

Any organization needs to ensure that it complies with all the possible rules and regulations of the government and the statutory bodies that govern it. It should adhere to the laws and statutes of the land to minimize any possibility of legal risks.

Strict compliance measures, policies, and protocols should be put in place. Management and concerned departments should ensure compulsory adherence to them throughout the organization. Non-compliance with regulations can result in economic loss to an organization and may be harmful to its future too. Any changes in the work pattern or line of activities should only be incorporated after a thorough examination of compliances and regulations.

Contractual fulfillment

Management should ensure efficient handling of each and every contract and ensure their successful completion. Non-completion and delivery on time may pose legal risks to the organization. Moreover, the organization must ensure an error-free production process. That will avoid any chance of faulty product reaching the client or consumer.

The chances of manual mistakes, overburdening of employees and resources, inability to deliver due to shortages or defects, etc. should be brought down to the minimum possible levels. Managers should be well informed about the company’s production and delivery potential and schedule. All this can bring down the legal risks considerably.

Disputes and conflicts

There should be an appropriate dispute and grievance redressal body in the organization. This will provide an appropriate forum to stakeholders such as employees, suppliers, and consumers to approach it in case of any grievance or dispute. The management should ensure there is no unnecessary litigation or claims on the company and legal risk, if any, are always in control. Also, this will ensure no damage is done to its business relations with customers and suppliers, and there are no employee grievances as well. This will help in building goodwill and saving a lot of valuable time and resources on legal risks.

In summary, legal risks are part and parcel of the business. You can not avoid it but all attempts should be made to mitigate or minimize these. Because the outcome of these risks could be far-reaching in terms of financial, operational, goodwill, and more. A well prepared and awakened legal department can help the organization to take care of this aspect. 

Sanjay Bulaki Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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