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STRATEGIC RISK MANAGEMENT FOR LAW FIRMS
By – FEMI D. OJUMU ESQ.*
Often the execution of dirigiste risk management processes is associated with those with a technical bent. Thus, accountants, engineers, laser surgeons, precision equipment manufacturers, physicists and pilots would readily fall into that bracket. So too would those in fields where precision is a critical element of a conceptual process with corresponding measurable outcomes. That is a legitimately held view. The flipside to this is the inherent tension in professions, like law, where attempted precision in legislative drafting say, is in itself, a basis for imprecision. How would one “risk-manage” the arcane precincts of statutory interpretation say? Art, jurisprudence and political discourse are other areas where risk management could be regarded as completely tangential.
This article focuses on the place of strategic risk management in law firms against the backdrop of the 2007/8 global banking crisis; Basel III; and the extra-territorial force of key seminal statutes. These include Nigeria’s Economic Commission and Financial Crimes [Establishment] Act (2004); the USA’s Sarbannes Oxley Act (2002). It concludes that risk management ought, reasonably, to be part of every lawyer’s active daily business.
Fundamentally, a risk is an event which might happen but which has not materialised. Naturally, there are consequences when risks do occur which could have adverse impacts on firms’ reputation and how they are perceived by clients, Bar Associations and regulators. Other significant consequences, in the context of law firms, could manifest in fines against individual lawyers and/or partners; sanctions against law practice personnel or the whole firm/partnership. Even worse, it could lead to suspension, and ultimately disbarment from practice. In extremis, where criminality is established, prosecutions inevitably follow which can result in lengthy jail terms for affected parties.
Implicit in the foregoing is the realisation that risk per se is not the central issue. Rather, the central issue is the early identification of risk and, critically, the mitigation and/or elimination of the risk. This arguably is the kernel of what is known as “risk management”
More formally, risk management entails inter alia having “access to reliable, up-to-date information about risks; decision-making processes supported by a framework of risk analysis and evaluation; processes in place to monitor risk; the right balance of control in place to deal with those risks”
A key raison d’etre of every commercial entity, like law firms, is to make a profit within the bounds of contracts, local regulations and statutes. For law firms especially, additional demands include external audit and financial management demands; binding regulations of local bar associations; mandatory professional indemnity insurance cover in certain jurisdictions including Australia, Canada, England and Singapore.
In an ideal world, every law firm would require little or no supervision and would be trusted to self-regulate; file accurate financial returns promptly; adopt the right strategies in case handling and prosecutions; strike the correct balance between their roles as “officers” of the courts in the administration of justice and duties to main client confidentiality etc. Clearly, that is not the world we live. One practical reason for this is that with globalisation and rapid advances in technology, information becomes more readily available to clients (and the public) in most jurisdictions.
A second reason is that social attitudes have changed. People do not necessarily feel inhibited whistleblowing where they see or perceive wrongdoing in the 21st century as they perhaps might have done before. The case of the Olympus (manufacturer and vendor of camera and precision instruments) chief executive illustrates this claim. Michael Woodford, the CEO (who was later removed) publicly challenged the chairman and board in 2011, over what he alleged were excessive acquisition payments costing $1.4bn (880m Pounds). A third reason is the ever increasing collaboration between nations at the political level; inter-operability between international agencies; the extra-territorial force of some domestic legislation.
Let us consider a few examples outside the strict boundaries of the legal profession per se to garner some insights on the weaknesses (or risks) and attempted mitigation strategies.
- Sarbannes Oxley Act (SOX) 2002
The key drivers for this Act were the major defects in governance which resulted in significant accounting improprieties. This engulfed large corporates and significantly undermined investor confidence. Inferentially, it indirectly harmed the global economy, directly harmed the reputation of corporate America and had the potential to seriously America’s economy with a 2002 gross domestic product of US Dollars $11.53billion.
SOX completely altered the regulatory dynamics of corporates and their governance by introducing additional reporting obligations; stronger ethics; and mechanisms to challenge conflicts of interests; discipline erring firms; enforce legal compliance. Put very simply, SOX was a robust strategic risk management intervention by the US Congress.
- Economic and Financial Crimes Commission Act Establishment Act 2004 (Nigeria)
Financial crimes and corruption are old as humanity and affect every country. The threat and/or reality of criminal prosecution have served as a necessary but insufficient deterrence across many jurisdictions even with the most robust statutes. In a 2004 Corruption Perceptions Index of 146 countries published Transparency International (TI), Finland ranked 1st and Nigeria ranked 143rd ahead of Bangladesh and Myanmar. Using a wider sample of 183 countries in the 2011 Index published by the TI, Nigeria ranked joint 143r. with Russia, Timor-Leste; Togo and Uganda; but ahead of Paraguay; Ukraine; Venezuela et al. New Zealand was number 1; USA, number 24; and South Africa, number 64. Clearly, these negative perceptions harm Nigeria’s reputation and market confidence however imperfect the methodologies adopted by TI.
To be clear, TI reports were just one of many drivers informing a more robust anti-corruption drive by the Nigerian authorities. Other drivers were the clamour by ordinary citizens for openness, jobs, and sustainable development which corruption was hindering. Responding to these challenges, the Nigerian government enacted the Economic and Financial Crimes Commission (Establishment) Act 2004. Section 1(2) (c) of the Act designates the Commission as the Financial Intelligence Unit in Nigeria and it is charged with “the responsibility of coordinating the various institutions involved in the fight against money laundering and enforcement of all laws (emphasis mine) dealing with economic and financial crimes in Nigeria”
Section 22 of the said enactment by inference and explication is an extra-territorial provision to the extent that it enables the seizure of illegally obtained assets. It provides in sub-section (1) that. “where it is established that any convicted person has assets or properties in a foreign country, acquired a. a result of such criminal activity, such assets or properties, subject to any treaty or arrangements with such foreign country, shall be forfeited to the Federal Government”
Pursuant to this enactment, hundreds of prosecutions have been made by the EFCC a number of which have resulted in criminal convictions. Thus, the EFCC Act 2004 was a risk management intervention by the Nigerian authorities.
- Basel III
It is widely believed that the worst global economic crisis (since the Great Depression of the 1930s) began in the summer of 2007 and had compounded by autumn 2008. This school of thought affirms that it was largely triggered by the slump in U.S. investors’ confidence in the value of sub-prime mortgages; itself, being a factual cause of a liquidity crisis resulting in stock market crashes, high unemployment, falling house prices and low output across the Eurozone.
In Nigeria, oil, the country’s top foreign exchange earner suffered a price collapse and the economy contracted not least because of reduced capital investments. According to the Central Bank of Nigeria, the market experienced a “capital market downturn, divestment by foreign investors with attendant tightness and possible second round effects on balance sheet of banks’ …bad debt and decrease in profitability”.
Concerted risk management measures were undertaken across the world to tackle the crisis through capital injections, quantitative easing and the consolidation of previous Basel Accords which resulted in Basel III. The latter is a global regulatory mechanism – commencing in 2015 to “improve regulation, supervision and risk management in the banking sector.
Evidently, banks as a matter of principle do not act in isolation; they must ensure that their actions, lending and other policies are as legally watertight as possible. In other words, they rely on attorneys/law firms for professional advice amongst others. If it is accepted that they do, the reasoning that sharper regulation, supervision and risk management will, by extension, apply to the very attorneys/law firms to whom they turn for professional advice.
The financial crisis witnessed an unprecedented level of fiscal stimulus packages to stimulate underperforming economies globally. The G20 economies (applying prudent risk management assumptions) on their own invested more than US Dollars $2trillion in quantitative easing measures representing approximately 1.4% of the world’s gross domestic product.
The singular thread linking the above mentioned cases-studies is that the significant problems (or risks to the economy, national reputation, investor confidence, financial meltdown, societal wellbeing) were tackled by states often with statutory and policy inventions. Yes, law firms are commercial entities and arguably what applies at a national level does necessarily apply to a commercial entity. That is true – to a point.
A law firm will just as easily benefit from having and using robust internal policy and governance systems; embedding early warning measures to spot significant strategic and operational risks to the business; developing adequate measures to identify and report money-laundering; engaging the right calibre of staff; learning and applying lessons from top global law firms around the world; compulsory risk management awareness seminars (overseen by Bar Associations) for every lawyer and non-lawyer employed by firms.
This paper concludes that effective strategic risk management in law firms is not an optional extra in 2013 and coming years. Rather, it ought reasonably, to be part and parcel of a law firm’s toolkit underpinning the givens of advocacy; integrity; high intellect; and knowledge of the law. Every citizen has a duty to uphold the law. Lawyers have a “higher” moral obligation to uphold the law as they advise citizens on the law. Besides, lawyers across all jurisdictions have a duty to act in a manner which justifies the genuine confidence the public places in them as honest and trusted advisers. How could be such an attorney or law firm truly discharge those responsibilities without meaningfully grasping the essentials of risk management however grandiosely couch
· INTERNATIONAL Arbitration and the Dynamics of the English Arbitration Act 1996
Defining any legal term in the context of international arbitration with sufficient precision to command universal application or indeed to carry persuasive force in tribunals is no mean feat. This is because international arbitration, although underpinned by agreements freely entered into between parties can often be compounded by the construction of different legal frameworks, the relative complexities of unlocking conflicting laws, and procedural arrangements. Notwithstanding, there are practical guides including arbitration rules, statutes, case law emanating from the common law, civil law jurisprudence, and trans-national law sources to inform the explication of these issues.
The word substantive means the “essential element of a thing” and the law has also been defined as a rule or set of rules enforceable by the courts regulating the conduct of subjects/citizens towards each other. Combined, it logically means the law governing the essential element of a thing for example, a contract, or arbitral proceedings.
Another meaning of the phrase is “the actual law, as opposed to adjectival law or procedural law”. Section 1(b) of the English Arbitration Act (AA)1996 establishes that the “parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest”.
Further, section 46(2) AA1996 establishes that “the choice of the laws of a country shall be understood to refer to the substantive laws of that country”. The phrase “the choice of the laws…” within the meaning of s 46(2) AA1996 implies that the parties to arbitral hearings have to consent to what ultimately becomes the substantive law governing their arbitral dispute. Lord Hoffman reaffirmed this principle in Premium Nafta reaffirming that “arbitration is based upon agreement and the parties can by agreement, waive the right to court…”
Although not expressly defining the term “substantive law”, article 28(1) of the UNCITRAL Model Law on International Commercial Arbitration (1985 as amended in 2006) stipulates that the arbitral tribunal “shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute”. Similar provisions are enunciated in article 21 (1) of the 2011 ICC Arbitration and ADR Rules viz the: “parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute”. Interestingly, the second limb of that article confers discretionary powers on the arbitral tribunal where, in the absence of the parties’ agreement, it is empowered to “apply the rules of law which it determines to be appropriate”.
It is worth emphasizing that the ICC Rules, like other institutional rules, are largely influenced by the UNCITRAL Arbitration rules.
When taken together, one can surmise that the substantive law in the context of international arbitration can be taken to mean the law that applies to the substance of a dispute and is one which the parties have freely chosen. If the parties have not freely chosen the substantive law or arbitration rules (e.g. in ad hoc arbitration), the law of the jurisdiction most closely connected to the dispute will be the substantive law.
Section 4 (5) AA 1996 buttresses this point: “for this purpose an applicable law determined in accordance with the parties agreement, or which is objectively determined in the absence of any express or implied choice, shall be treated as chosen by the parties”.
Simply defined, procedural law in the context of international arbitration is the law governing arbitration and procedure. It is generally assumed to be the law of the place or seat of the arbitration which is also widely known as the “lex arbitri”. Whilst the parties can theoretically choose another procedural law to regulate their arbitration agreement this rarely happens.
So, what does lex arbitri really mean? Trenchant insights are gleaned from Steyn J. in his formulation in Smith Ltd v. H & S International : “what then is the law governing the arbitration…the law governing the arbitration comprises the rules governing interim measures (e.g. Court orders for the preservation or storage of goods), the rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties (e.g. filling a vacancy in the composition of the arbitral tribunal if there is no other mechanism) and the rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations (e.g. removing an arbitrator for misconduct)”
Article 14 of the Explanatory Notes on the Model Law, whilst alluding to the “lex arbitri” provides that: “in most legal systems, the place of arbitration is the exclusive criterion for determining the applicability of national law and, where the national law allows parties to choose the procedural law of a State other than that where the arbitration takes place, experience shows that parties rarely make use of that possibility”.
Reinforcing this principle, the English Court of Appeal (CA) in the Peruvian case analyzed an arbitration agreement which provided for an arbitration to be located in Peru but governed by English procedural law. The CA whilst noting that this was theoretically possible emphasized that it was fraught with practical complexities. Kerr LJ observed inter alia that excepting the instant case: “there appears to be no reported case where this has happened. This is not surprising when one considers the complexities and inconveniences which such an agreement would involve”.
It is important, however, to stress that the no universal principles can be applied to what constitutes procedural law. Nevertheless, in the light of the above, some examples of the “lex arbitri” or law of the seat could, according to the authors Redfern and Hunter include: the definition and form of an agreement to arbitrate; whether a dispute is capable of being referred to arbitration ( that is to say, whether it is “arbitrable” under the ”lex arbitri”); the constitution of the arbitral tribunal and any grounds for challenge of that tribunal; the entitlement of the arbitral tribunal to rule on its own jurisdiction .
The rules which govern the arbitral procedure together with the applicable procedural law are commonly referred to as arbitration rules. International arbitration, like most human inventions, is not a static, but a dynamic concept. It evolves as society evolves just like the common law and civil law jurisprudence and developments in domestic and international law. Likewise, international arbitration rules are constantly evolving. A number of principles govern international arbitration and some of these are outlined:
a. UNCITRAL Rules:-These were adopted in 1976 by the UN General Assembly and recommended for use in the resolution of international commercial disputes via arbitration. They regulate arbitral proceedings from commencement to notification of the final award. UNCITRAL Rules represent the industry standard and have influenced the drafting of many institutional arbitration rules.
b. UNCITRAL Notes on Organizing Arbitral Proceedings: – These aim to assist arbitrators and parties by listing and briefly describing questions on which appropriately timed decisions on organizing arbitral proceedings may be useful. The Notes, prepared with a particular view to international arbitrations, may be used irrespective of whether the arbitration is overseen by an arbitral institution or not, and are particularly useful in ad hoc arbitration proceedings. They serve as very useful checklists for arbitral tribunals, the parties and their counsel on what issues to prepare for and when, both before and during the arbitral proceedings.
c. Institutional Rules: – Leading international arbitration institutions manage arbitration proceedings through the instrumentality of specific published arbitration rules. These rules are reviewed periodically to maintain their currency and notable examples include the International Chamber of Commerce (ICC) Arbitration Rules 1998; International Centre for Settlement of International Dispute (ICSID) Rules 1984; London Court of International Arbitration (LCIA) Rules 1998; Singapore International Arbitration Centre (SIAC) Rules 2007 et al. Appendix A outlines other arbitration rules.
It would be misleading to assume that there is mutual exclusivity between substantive law, procedural law and arbitration rules. There is none as tribunals flexibly engage and tailor the principles to the specifics of particular proceedings. The arbitral tribunals (and courts in exercising their supervisory jurisdiction) generally tend to give effect, wherever possible, to what the parties have themselves agreed and choice of applicable law applying the principles of equity, fairness and justice. This contention was forcefully advanced by Lord Hope in the Premium Nafta case : “allegations that are parasitical to a challenge to the validity to the main agreement will not do…the agreement to go to arbitration must be given effect”.
Indeed, arbitration agreements can sometimes require arbitral tribunals to act as “amiable compositeurs” (i.e. deciding issues according to what is fair and just) or ex aequo et bono (i.e. in justice and good faith). Basic equity principles of English –dating to the 1873-75 Judicature Acts – law empower courts to exercise their discretion in granting equitable remedies – again reinforcing the principles of fairness and justice. To that extent, it is difficult to envisage a situation where there is mutually exclusivity between the three concepts. Let’s illustratively consider the challenge provisions of the UNCITRAL Arbitration Rules and the ICC Arbitration Rules.
UNCITRAL Arbitration Rules
The challenge and replacement of arbitrators is governed by Articles 10-14 and any arbitrator may be challenged if circumstances exist that “give rise to justifiable doubts as to the arbitrator’s impartiality or independence”. The challenging party shall, within 15 days of the emanating cause of action, send notice of the challenge to the members of the tribunal and other party. That notice must be in writing with reasons for the challenge. Where the other party agrees to the challenge or the challenge or the challenged arbitrator withdraws, a replacement arbitrator is appointed. Where the challenged arbitrator fails to withdraw or the other party disagrees with the challenge, the decision will be made by an appointing authority.
ICC Arbitration Rules
Article 11 governs the challenge of arbitrators and provides inter alia that “a challenge of an arbitrator, whether for an alleged lack of independence or otherwise, shall be made by the submission to the Secretariat of a written statement specifying the facts and circumstances on which the challenge is based”.
Unlike the UNCITRAL Rules above which specifies 15 days for challenging an arbitrator (from when a cause of action arises), the ICC Arbitration Rules, specify 30 days. The ICC Secretariat will notify the arbitrator concerned, other members of the tribunal and the other party and receive comments in writing from them. Those comments will be communicated to all parties before the ICC Court of Arbitration makes a decision. It does not state the reasons for its decisions and either upholds or rejects a challenge. In 2005, the ICC Secretariat received 37 challenge applications and the ICC Court upheld just 2 (ICC 2005 Statistical Report ).
The key point to bear in mind in both Rules is that they seek to pre-empt and address concerns around potential and/or real bias amongst arbitrators and set the principles on which arbitrators can be challenged. The logical inference which can be drawn from that is the high premium placed by these Rules on natural justice, due process and fair hearing – all cardinal principles in common law and civil law jurisprudence.
One comparator unique to the Model Law and the AA1996 is the doctrine of “competence-competence”. Simplified, it means the power of an arbitral tribunal to independently determine and rule on its own jurisdiction over a particular arbitral dispute without recourse to a national court. Statutory authority for this assertion is provided in Article 16 (1) of the Model Law viz: “the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of an arbitration agreement”. Likewise, section 30 AA 1996 reinforces that provision providing that “the arbitral tribunal may rule on its own substantive jurisdiction”. The use of the term “may” in both statutes implies that this is a discretionary power exercisable by the arbitral tribunal. By implication, if an arbitral tribunal fails or refuses to exercise this power at the instance of a party to an arbitration proceeding recourse lies with the national court.
Summing up, given the inter-play of the substantive law, procedural law and arbitration rules, the freedom of the parties to determine the principles and choice of law governing their arbitration agreement is arguably one, but not the, crucial aspect of the dynamics of international arbitration. For example, notwithstanding the express intentions of parties to an arbitration agreement, section 4 and Schedule 1 AA 1996 outlines mandatory provisions which will engage the procedural law if the matter is held with the territorial jurisdiction of the English courts ( i.e. in England, Wales and Northern Ireland).
Likewise, if the parties have willingly submitted to the jurisdiction of an institutional arbitration e.g. ICC, that institution’s arbitration rules will govern the arbitral proceedings.
The opposite is the case where the parties have an arbitration agreement but have not specified which institutional arbitrator or process should regulate their dispute. This triggers the ad hoc arbitration process which established arbitral institutions like the London Court of International Arbitration are well-equipped to handle.
The overriding philosophy in international arbitration is that arbitration tribunals courts are mostly likely, on the persuasive and combined effects of the Model Law, the 1958 New York Convention, domestic legislation like the AA 1996, the agreement of the parties, the critical objective to obtain fair dispute resolution without unnecessary delay and expense, to give effect to the parties express agreements where the justice of the specific dispute so demands.
2012 ©Femi Ojumu & Co. Barristers and Solicitors. All Rights Reserved.
Appendix A: (Other Arbitration Rules)
1. International Bar Association (IBA) Rules of Taking Evidence in International Commercial Arbitrations 1999:- These Rules deal with the various evidential issues and provide guidelines on the admissibility of evidence in international arbitration proceedings. These rules combine best practice from civil and common law jurisprudence. As parties’ agreement underpins all arbitral proceedings, those seeking to use these rules must agree their adoption in advance.
2. IBA Guidelines on Conflicts of interest 2004:- These contain provisions on conflict situations, disclosure and their handling. They are also used as guides by national courts and arbitral institutions and help to harmonies principles used to settle international arbitration.
3. Soft laws: – These are rules of good practice and guidelines which have persuasive force. To have effect as contractual terms creating binding rights and duties, they must be formally incorporated into arbitration agreements by the parties. CIArB provides some of these “soft laws” for example model contract clauses, arbitration protocols, security for costs etc.
4. Codes of ethics: – Opinion is divided on whether arbitration is a discrete profession in the same way as architecture, law, medicine or pharmacy ergo, there’s no single binding universal code of practice. Nevertheless, the IBA Rules of Ethics broadly constitutes good practice for arbitrators. Likewise, the American Arbitration Association/American Bar Association Code of ethics for Commercial Disputes 2004 applies to its members, as does the Singapore International Arbitration Court’s Code of Conduct for Arbitrators applies to arbitrators under its rules.
*Mr Femi D. Ojumu LL.B (Hons), BL, MBA, ACIArb (UK)
Mr Ojumu a Barrister and Solicitor of the Supreme Court of Nigeria. He is senior partner of Femi Ojumu & Co. Barristers and Solicitors, Lagos, Nigeria.
- The English Legal System (Slapper & Kelly) 10th Edition 2009-10.
2. Law and Practice of International Commercial Arbitration (Redfern and Hunter et al) 4th Edition 2005.
3. International Comparative Law Series – International Arbitration.
4. Chartered Institute of Arbitrators – International Arbitration (2008).
5. Collins English Dictionary (2000).
6. UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments adopted in 2006).
7. UNCITRAL Arbitration Rules (as revised in 2010).
8. English Arbitration Act 1996.
9. International Comparative Legal Guide Series www.iclg.co.uk
10. International Court of Arbitration and ADR Rules 2011.
Copyright © 2012 Femi Ojumu & Co. Barristers and Solicitors