Legal Risk Management Anticipating and Pre-Empting Legal Problems

Transcription

1 International In-house Counsel Journal Vol. 3, No. 10, Winter 2010, 1 1 Legal Risk Management Anticipating and Pre-Empting Legal Problems AURELIA DRAGOMIRESCU Director, Legal, Vodafone, Romania Legal service provided by in-house lawyers evolved over the last period from pure advisory and consultancy type of business into legal risk management. Business is considering in-house lawyer as their business partner and not only as their specialist in legal matters. This demanding relationship will lead in-house lawyers to focus on proactive legal services to manage business expectation anticipating and pre-empting legal problems. Legal work will no longer required to concentrates only on addressing specific deals or disputes but to understand the business in all aspects and to align the legal strategy with the company strategy. Such business expectation trigger high responsibilities for an in-house lawyer in Romania where the legal regime is a fast changing environment and where the judicial system does not recognize the precedent concept. Therefore to predict the chances in case of a potential litigation and to develop a legal strategy for the specific needs of the business is a challenge. I shall develop in my article some of the challenges developing the trust business relationship with the internal clients. I shall not forget the reason why I choose to go to the Law University the Court cases and I shall explain some challenges that we might have following interpretation of the precaution principle stated in European Union Treaty. Legal Risk Management Any in-house lawyer is confident advising on his (or her) area of expertise but at the same time has a vague feeling of uneasiness that something is 'out there' that is not being covered. That something could be in the context of a one-off transaction, a continuing activity of a project for the development of a new product or general day-to-day activity. Everyone might be in the position to give the best advice in his area of expertise and make the best efforts to make the things happen. But there might still remain a vague feeling that there is something lurking, like an unseen predator at the edge of the woods - difficult to identify but surely one day it will strike. Providing daily legal support to the business as in-house lawyer, I understood the importance of having in place a legal risk management program and how this program build the trust relationship with the business. The in-house lawyer has the additional training to proactively use the law as a creative tool to shape the rules of business engagement, craft innovative deal structures and navigate successful business solutions through complex regulatory environments. How you gain the additional training? By having a constant dialogue with the business, by having a direct implication from early stages in each project and new line of business. International In-house Counsel Journal ISSN print/issn online

2 2 Aurelia Dragomirescu Most lawyers are skilled at risk analysis and avoidance. In principle, lawyers are seen by business in the first place as risk allergy distinct from the risk addiction- person. Inhouse lawyer need to adapt his zero tolerance for risk to respond to the business directive to maximize shareholder value. A real transformation of the model of legal advice will need to be considered to respond to business expectation. The legal strategy will incorporate a risk calculus into the strategic planning, consistent with the companies risk appetites and legal constraints. One of the key elements in the process of risk management of any sort is identifying the risk in the first place. So what is it that gives a lawyer the sense of unease? How do you identify the risk, define it, assess it, and then manage it, reduce or eliminate it? How do you get others to understand what you are talking about and take the risk seriously? How do you build the trust within the business as such to gain the recognition as high professional and partner in making business decision? Business Partner Legal Risk Awareness Presentations, workshops and 'road shows' to as many employees as possible, in order to raise awareness and increase familiarity with aspects of legal risk are keen when building the proactive legal strategy. The methods the company might use to minimize and avoid legal risk need to be transparent to the business decision makers in order to make conscious decisions. It is the role of in-house lawyer to transpose the business needs into legal framework and to identify in early stage the legal risk. Once identified the legal risk it is the state of the art to understand the business implication of the legal risk identified and scale down such legal risk in figures the language of the business. The internal business customers will value the availability and commitment of a dedicated person within the Legal team. Such dedicated person will give a real confidence to the business that a partnership is created. Why I referred to a partnership type of relationship the mutual communication of business knowledge and legal knowledge will drive high achievements in tailoring the legal strategy to respond to company strategy. Such partnership evolved from the initial stage of providing basic training for legal issues into a Legal for non-legal program. Such program need to include basic legal knowledge and check list of legal mandatory requirement to easy identification of legal risks in each new project or activity of the company. Legal Audits Information is around us. We are using a lot of information in order to assess the best solution. Each of us is recipient and issuer of information that might be relevant for another party. We all know that information is crucial but are we enough transparent when delivering the information or do we know if the information embedded in a recommendation to the business reached the audience in the way we wanted? What will be relevant to the business what will help identify areas of strength and weakness, for example: a review of current litigation, arbitration or other conflict resolution techniques, to assess internal and extenal costs, likelihood of success, settlement options

3 Legal Risk Management 3 a review of standard contracts to assess whether the dispute resolution mechanisms are the most appropriate for the type of activity covered by the contract a review of existing contractual relationships with suppliers, distributors, customers and joint venture partners to assess whether there are any 'smoldering disputes' that can be avoided, or 'skeletons in the cupboard' to tackle will represent the main area of a Legal audit program. Such actions need to be recurrent and results, analyses and recommendation need to be presented to the business. Regularly updates to Senior Management will add value to the business and will be an important way to consolidate the trust. In a challenging market environment as telecommunication field and when the market is a mature one, one important differentiator is the customer experience. How the legal audit program may help improving the customer experience indicator? It is in our power to disseminate the information in our hands court decision in the cases initiated by the customers, sanctions applied by Consumer Protection Officer, reasons for complaints by the customers and to propose actions to improve interaction with the customers following the analyze of the above mentioned information. In-house lawyer is expected to give input also in respect of operational risk for the company and not only of the legal risk. This operational risk is the one that, in the course of the conduct of the company s commercial operations, it will incur obligations or liabilities that were not foreseen, or are greater than were foreseen or that its rights and claims prove to be fewer, or of a lower value, than had been expected. I shall give some examples of legal risk which will have an impact in the operations of the company: a) The possibility that contractual rights will be void or unenforceable because of: illegality; a technical defect (e.g. lack of restriction or registration); lack of capacity (e.g. registration of the object of activity with the Trade Registry for the service provider). b) The possibility that a contractual or statutory provision may be interpreted differently by a court than by the company either because of misunderstanding by the company, or because of misunderstanding by the court. This risk is particularly acute where the contractual documentation is complex or the nature of the activity is high-tech as the case of telecommunication field and the court is not specialist (e.g. provisions of data services, protection of personal data, protection of intellectual property rights via Internet). c) The possibility that a court will take a view on a technical point that is different from the view on which the company has relied, with adverse consequences e.g. a court may categorize a contract as a distribution contract (and, accordingly, subject to the clearance by the Competition Council) contrary to the view taken by the company. d) The possibility that legal proceedings will have an adverse consequence greater than expected (or a favourable consequence lower than expected) e.g. the company takes an over-optimistic view of the outcome of litigation or regulatory proceedings. e) The operations of the company produce unforeseen liabilities to third parties e.g. the company becomes liable to compensate third parties because of the default or fraud by another party to a transaction with the company.

4 4 Aurelia Dragomirescu f) The possibility that the company s operations might infringe the legal rights of third parties e.g. breach of copyright or patent infringement. g) The risk that the company s claim, although sound in law, will not be capable of satisfaction in practice e.g. a counterparty may refuse to honour it obligations and precipitate litigation as a delaying tactic. The company s claim, although sound in law, will not be satisfied because of the insolvency of the debtor. h) The risk that a claim by the company, although it appears likely to succeed, may fail because of unforeseen events occurring during the litigation process (e.g. the declaration of bankruptcy made by the defendant). i) The risk that the company s rights, although they appear secure in law, may need to be enforced in an overseas jurisdiction with which the company is unfamiliar. Its right to claim may, therefore, be subject to potential difficulties of procedure of which it is unaware. It is keen to acknowledge the interdependencies of legal risk and operational risk and for the in-house lawyer to present to Senior Management the recommendations going forward packaged to respond to business expectation how to do things and to respond to the business directive to maximize shareholder value. Legal Compliance Program In-house lawyer support is more than the legal advice. He is the legal function for the business. In-house lawyer need to put in practice the legal knowledge and build the right guidance for the business decision makers. The legal compliance program will combine the legal mandatory requirements, the legal guidance for specific area of the business alongside with the legal practice. How to build an effective and cost efficient legal compliance program: build up legal check list a standardized document to easy the scanning of legal risk in all areas of interests; build up legal guidance to address recurrent legal aspects in different part of the business e.g. Data Privacy, Consumer Protection Rights, Competition issues; issue regularly reports on law practice with clear reference to the applicability in the business area; implement a program to monitor the proposal to change the existent applicable law. To see the efficiency of the program you will need to measure the effects. One way to measure is to perform a Legal survey the results of the survey will give you some indicators to identify areas to improve. Regularly feed-back sessions with the business are another way to measure effects in such feedback session you may check the clients expectation, changes in the business portfolio and same time to offer them an update of legal issues in their specific area. Mitigation of Legal Risk Legal risk management will include a comprehensive identification, assessment, monitoring, control and mitigation of legal risk. One important component of such mitigation of legal risk is assessing the Court decisions. The difficult part when preparing a legal strategy to be presented to Senior Management comes when national legislation is continuously and quickly changing, the judges have total independence and you do not have the precedent concept. After 1 st of January 2007,

5 Legal Risk Management 5 the date when Romania became EU member, Romania adapted its system of law to EU legislation. It is a continuous challenge for lawyers to keep them updated with the successive changes in the laws, the Courts adapting their judgment considering the EU legal framework and individual citizen claiming rights deriving from EU legislation. I shall give a practical example of challenges in building a legal risk strategy. The network roll out is crucial for a telecommunication provider. The operational activity of network roll out is influenced by the national legislation in the way such national legislation is applied by each local authority when permit to build is requested. In addition, Romania implemented a local environmental policy in compliance with functional principles as stated in the EU Treaty. In a recent case, a national court of first instance applied the provisions of the precautionary principle, one of the four principles of the Article 174 of EU Treaty, and ruled in favour of an individual claim against an individual enterprise to remove the antenna for which it obtained the permit to build and national environmental legislation were observed. Is this court decision going to open a gate to future same type of ruling? And if yes, what action we might have to invalidate such type of ruling and to raise awareness that the objective of the EU Treaty, protection of the environment, is not attempt with individual ruling. The difficult role of the in-house lawyer will be to assess the implication of decisions when assessing the legal risk for the network roll out. court One important information in the assessment will be the ECJ rulings. The European Court of Justice has ruled that an individual is entitled to plead in proceedings before a national court an infringement of the general principles of proportionality and nondiscrimination in order to challenge the validity of an act of the Community institutions. General principles operate as a shield against the application of national or Community measures which violate them, not as a sword creating independently rights for individuals, thus they may be invoked by individuals before the national courts. Therefore the precautionary principle adopted by the European Commission based on the principles embodied in both Articles 6 and 174 EC, where environmental threats are deemed to be potential rather than proven risks, may be applied by national court when the validity of an act of the Community institutions is challenged. The EU Treaty contains no final definition of the precautionary principle as a legal norm. The precautionary principle provides authorities with both the right and the duty to protect the interests of the environment against enterprises. However it does not require enterprises to act environmentally correctly. The precautionary principle was meant to provide a more systematic response to the growing problem of scientific uncertainty in environment and health decision-making. The most familiar elaboration of a precautionary approach can be found at Principle 15 of the non-binding 1992 Rio Declaration on Environment and Development: In order to protect the environment, the precautionary approach should be widely applied by States according to their capabilities. The wording of Article 174 in the EU Treaty does not provide a basis for the principle to be interpreted as a requirement norm which directly obliges an individual enterprise to choose a course of action based on precaution. However, in a given case, when determining liability, the courts might look at whether an enterprise chose the course of action which was most in accordance with the precautionary principle.

6 6 Aurelia Dragomirescu One other important information in the assessment is the total independence of each national court and the fact that the national ruling procedure is not a precedent system base. This will bring a level of uncertainty when building a legal strategy of how to move forward. Will be other courts in the position to apply the precautionary principle in similar cases? How the courts of second instance will react when ruling the appeal? Are there other stakeholders who need to be involved e.g. regulatory body, industry representatives etc.? How the impact in the roll out might be quantified? As I previously mentioned, in Romania, the principle of the judicial system is based on the independence of the judge. According to the Romanian Constitution the judge is independent, his activity is subordinated to the enforcement of law and a judge is requested to be impartial. The ruling activity including interpretation and enforcement of the law is governed by two main principles: when ruling a case, the judge will rule the individual case and does not have the right to establish generale ruling in excess of the individual case brought in front of the court; when ruling an individual case, the judge is not bound by the decision issued in a similar individual case previously ruled by him or by another court; when ruling, the judge will apply his own judgement on the individual case subject to his ruling. Considering the above principles it will be difficult to predict the number of cases in which the court will apply the precautionary principle or not and to build a coherent legal risk assessment. The business expectation is to receive a recommendation based on a calculated risk which is that we know the uncertainty, we can quantify it, and we have the statistical tools to treat it in an appropriate manner. This is a well-established discipline which is also applied in risk analysis but in the specific example that I treated this might appear as almost impossible. Although the predictability of the number of cases where the court will apply the precautionary principle in their ruling is very low, in-house lawyer need to combine his legal knowledge with the business knowledge in order to identify and propose actions for further deployment of the network. How to deal with this level of uncertainty? This is why building the legal strategy is a continuous challenge. Uncertainty gives the opportunity to in-house lawyers to always search for out-of-the box solutions, mitigation of risk. And this is the beauty of the legal function. Beyond the legal advise the in-house lawyer is experiencing the business knowledge which will give him a new perspective of the possible solutions to consider and evaluate. Aurelia Dragomirescu has an experience of 25 years of practice as in-house Counsel. She has found the work as in-house fascinating and challenging. She is also focusing on ADR and methods and arbitration. Vodafone Romania, a subsidiary of Vodafone Group Plc., had 9,532,530 customers, as of 30 June Vodafone is the world's leading international mobile communications group with approximately 315 million proportionate customers as at 30 June Vodafone currently has equity interests in 31 countries across five continents and around 40 partner networks worldwide.