Managing Legal Risk

Sergio Scandizzo

If it is true that all risks are ultimately credit risk, since all losses have to be eventually absorbed by somebody’s net worth, it is equally true that most of such losses end up in the courtroom or at least in lawyers’ offices (or both). The importance of legal risk grows with the overall risk exposure and becomes paramount in times of financial and market crisis. In this chapter, we will look at the definition and classification of legal risks as well as its key driving factors. We will examine the process of identification of legal risks and the possible methodological approaches to the assessment of such risks. We will then go on to describe the key elements of a management framework for legal risk.

DEFINITION AND CLASSIFICATION

There is an ancient Latin proverb that can be roughly translated as: “where the law is uncertain, there is no law.”¹¹ Ubi ius incertum, ibi ius nullum, (Campbell Black, 1995). This suggests that the term “legal risk” contains something of an oxymoron. Historically, law is perceived as protection against risk – that is, against the uncertainty of abuse, violence and arbitrary rule, rather than a source thereof. The establishing of the rule of law