To enable inhouse counsel to effectively fulfill its role of legal risk management, there should be relevant frameworks and policies in place to govern the management of legal risk...
Simply, legal risk is the risk of harm which may arise in the following categories:
• Contract Management
• Disputes, and litigation arising therefrom
• The protection of property, inclusive of intellectual property
• Non-compliance with the law or regulation, arising from one's conduct for failure to comply with the law
• Lack of adequate skill and experience of inhouse legal counsel, or when briefing external legal counsel
The role of inhouse legal counsel (inhouse counsel) is both to provide legal services and mitigate the possibility of legal risk arising. To enable inhouse counsel to effectively fulfill its role of legal risk management, there should be relevant frameworks and policies in place to govern the management of legal risk. As legal risk is part of operational risk (which is risk resulting from failures of people; processes; systems; or internal or external fraud), any legal risk management framework should be consistent with a company's operational risk framework and form part of the same.
All contracts between a company and its customers or service providers should be in writing, detailing all obligations of both parties. A contract must deal with all potential risks that could arise in the performance of the services; and have adequate mitigation for these risks, including but not limited to indemnity and warranty clauses, and relevant dispute resolution clauses.
Where there is outsourcing of any material function of a company, there should be effective controls in place to ensure effective contract management. This will include the monitoring of renewal of contracts, breaches, impact of any changes in regulation relating to the services provided under the contract, and rights for termination of the contract.
From a business perspective, the business unit for which the contract is drafted, must understand the terms of contract, be aware of its obligations under the contract, their termination rights for convenience, and what actions give rise to breach, in relation to the service provider. Effective contract management can mitigate legal risk arising and also minimize disputes and litigation with service providers failing to provide adequate services.
Dispute Resolution and Litigation
A dispute must be adequately managed by inhouse counsel with the requisite skill and experience in dispute management and litigation, and similarly when an external attorney is briefed to attend to the matter.
Disputes and litigation must be catalogued in an accessible format to enable accurate reporting and escalation to relevant board committees, in particular in the case of high risk matters, which could result in accompany paying out large amounts in damages, or where there is potential for reputational risk to a company.
Although the dispute or litigation is managed by inhouse counsel, the root-cause of an action can arise from a breakdown in the operations of the business, and therefore reporting and monitoring of these matters, should also be reported to the Operational Risk Committee. In such instances, remedial action can be taken, such as disciplinary proceedings in respect of staff, or the review of processes or systems, which resulted in the dispute or litigation.
Protection of property, inclusive of intellectual property (IP)
The role of inhouse counsel is usually focused on the protection of intellectual property, such as trademarks, domains, patents, designs and copyright. The company brand must be protected in all respects and in particular, in all countries where the company operates. In addition, renewals of trademarks and domains must be done in a timely manner. Inhouse counsel usually manage a company's IP portfolio, with an external firm specializing in IP law. Where third parties may use similar marks (with or without intention) to a company's marks, demands must be sent to such third parties to refrain from using such, and failure to do so, can result in a dilution of a company's brand, or cause confusion in the market.
Inhouse counsel must work in close collaboration with marketing and brand teams of a company, who should be aware of and have a complete understanding of their IP rights in brands, names, marks, designs, ideas and inventions that must be protected. Marketing teams must know when there is need to involve their inhouse counsel in matters relating to the brand.
Non-compliance with the law or regulation
Ensuring compliance with law and regulation is generally a compliance function (and not a legal function per se). The role of compliance is, among other things to ensure that all business units in a company comply with all applicable law and regulations in the conduct of their business, processes and documentation with both clients and service providers. In addition, where applicable, relevant reporting to regulators must also be done in the format required and within the timeframes stipulated in relevant regulation. Failure to attend to the same, could lead to fines, penalties, and reputational risk for the company. The role of inhouse counsel, in my view is a support role to compliance, to provide legal interpretation when required, or assistance in defending in allegations of non-compliance.
The role of inhouse counsel is also to monitor and review new emerging legislation and regulation, and amendments to existing legislation or regulation. Where appropriate, inhouse counsel should comment and recommend changes to draft legislation in the lobbying process, to minimize any risks that could arise to the business of the company or the manner in which it conducts its business. Inhouse counsel should conduct such reviews in consultation with its internal stakeholders, including business units where the emerging legislation will impact. Lobbying should ideally represent the views of the company in a responsible manner, bearing in mind the purpose and spirit of such emerging legislation or amendment to existing legislation, and where possible, through an industry body.
In conclusion, failure to manage legal risk can lead to financial loss and reputational damage to a company. Inhouse counsel should engage in a collaborative manner with its business partners, external stakeholders and service providers alike to ensure legal risk is effectively managed. Where there is a large inhouse counsel team working across various business units in the company, collaboration on legal risk issues affecting the company will be imperative. Furthermore, drawing on expertise, and the leverage of skill of inhouse counsel in one business unit for another, will add value not only to such both business units, but to the entire company. Governance frameworks to manage legal risk in such instances will ensure consistency in the way in which it is managed across the group. From a C-suite level, inhouse counsel is often called upon to assist on matters of a strategic nature to advise on potential legal risk, and the mitigation or management of same.
Legal risks often do not arise in isolation. Usually a legal process supports a business process or relationship, and if the legal risk is considered and mitigated, the risk to such business will be mitigated. For example, if a business requires a contract with a service provider, and inhouse counsel has drafted a sound contract, the legal risk in that way is mitigated.
Therefore, effective inhouse counsel should be a business enabler, understand the business, its potential legal risks, and thereby be a trusted business adviser.
Head of Legal Risk Management, FirstRand Bank Limited
Mala Somers is Head of Legal Risk Management for FirstRand Bank Limited. Mala holds Bachelor of Commerce and LLB degrees, as well as Master of Laws in Banking Law and Corporate Law. She studied at the University Of KwaZulu Natal South Africa and the University of South Africa, and is an admitted attorney of the High Court of South Africa, and conveyancer. Following a short time as a practicing attorney, she has been in the banking industry in South Africa since 2001. Mala has been with the FirstRand group for 5 years in her current role. She has experience in corporate and financial services regulation; commercial, consumer, labour and privacy law; legal risk governance; legal knowledge management; and intellectual property governance. She is the chairperson of the FirstRand Legal Black Economic Empowerment (BEE) Committee and the FirstRand Intellectual Property Committee. In her free time, she enjoys reading, running and traveling.