What is Preventive Law?

As a discipline Preventive Law (‘PL’) was first proposed as a legal concept in the 1950’s by Louis M Brown who is widely regarded as the founder of Preventive Law.
[see – http://www.preventivelawyer.org/main/default.asp].

The term Preventive Law is used as a unique descriptor of ‘legal’ risk management. This is to differentiate it from Risk Management per se and the pre-existing definition predominately associated with the prevention of workplace injury.

The basic premise of Preventive Law is that lawyers can better assist their clients by the proactive investment of resources in consultation and planning rather than relying on reactive dispute resolution as a way of addressing legal problems. The benefit, or detriment, of past experience is invested into current conduct to limit the frequency and scope of future legal problems. A properly developed and integrated PL strategy promotes a change in human behaviour as a means to better manage legal risk.

The management of risk in business is a daily occurrence but, I suggest that the management of legal risk via PL will be a novel concept to the majority of businesses.   PL should be regarded as part of an organisation’s overall risk management strategy. It follows the same systematic lines as a ‘classic’ risk management process, identify risk, manage and feedback to the client with a view to improvement.
What are the benefits of Preventive Law to a Business?

The most important benefits are better corporate governance and an increased profit margin.

A sub component of Corporate Governance is corporate oversight, which provides a means of determining compliance with laws and regulations as well as internal corporate controls without interfering with business productivity.

A continuous proactive approach to a business’ legal risk rather than an annual or, worse, an ad hoc crisis review, will avoid large scale expenditure to correct a future problem or being involved in litigation or a regulatory prosecution.  A key feature of PL is a mandatory requirement for all decision makers to consider the early engagement of legal assistance with a project, endeavour or business decision.  This reflects what sophisticated clients and experienced lawyers have been doing as a matter of course for a long time. This approach can provide a continuous real time stream of relevant information for corporate oversight via the business’ legal department.

Private lawyers, as opposed to ‘in house’, are an expensive input to any business.  That expense increases exponentially the more urgent or complex the problem to be solved.  Typically an urgent issue will involve a team of lawyers to solve the problem and provide advice and support. That team of lawyers often lead by a partner or senior associate will cost several thousand dollars an hour. A monthly legal bill of $50,000 – $80,000 is typical for large scale litigation.

Do managers understand and address legal risk?

The larger and more complex an organisation the more ‘distance’ that exists between the owners or Board of Directors and the day to day business activity. Typically decisions are made by various levels of management via delegated authority, either financial or contractual. Some of the decisions can result in significant failures to address legal or commercial risk, due solely to the inexperience of the manager or the employee who prepared the brief for decision and in the absence of legal input.

But, there is only so much supervision that senior managers are capable of performing.  From my experience I have distilled a recipe or formula if you like, for business disaster =
A manager employed or promoted into a middle to senior position + commercially unsophisticated / poor match of skill set + minimal or no training / handover + pressure to perform and deliver + delegations to sign and spend + lack of supervision or by assumption

Each one of these points is illustrative of multiple similar events and are drawn from my personal experience –

• Unrealistic time frames for legal advice – 11th hour
• Advice being ‘ignored’ or ‘modified’
• “Legal advice” = “obstructive or unhelpful” not protective of the business
• Late or on the day notification of court / tribunal action
• Entry into Contracts without advice
• Ignoring the contract terms and obligations
• Undocumented ‘arrangements’ with third parties
• Engaging providers outside of ‘panel’ arrangements
• Agreements in breach of industrial awards
• Ignoring risk averse purchasing policy in order to obtain vendor’s $ discount
• Accepting vendors terms when adverse – IP owned by vendor, maintenance costs by business
• Undocumented retainers – cash advance
• Project completed + $ paid but no contract – breach of financial accountability / internal audit policy
• Deliberate ‘splitting’ of payments for settlement of claims to under financial limit to avoid reporting to corporate office
• Failing to enforce own HR policies – bullying and harassment

In some of these events the culprits were quite senior management of whom there would be an expectation that they ‘ought to have known better’.  Most of these events will cost a business a great deal of money in increased internal expenditure or legal costs.

A preventive law strategy

If your organisation has experienced any of these events, or worse, you don’t know if it has or not, then PL is the pathway to follow from now on. The introduction of a PL strategy and legal risk management processes will provide much better control of risk and avoiding this type of behaviour in the future.    Every organisation has the capacity to better identify and manage its legal risk.

One measurable effect of the introduction of P L will be an increase in requests for legal advice.  But, rather than the increase in workload being a negative, it will be a genuine positive.  The referrals will be much earlier in the business process which will allow for a better allocation of capped resources and a genuine priority process linked to overall risk rather than just urgency of time.  The limit on resources and the requirement to deliver on time are drivers for all in-house counsel.

And of course another benefit for in house counsel will be a system to collate good quality evidence of recalcitrant behaviour by staff with a responsibility to report that to senior management.  Accountability is a powerful motivator to change human behaviour.

The above examples are also illustrative of the benefit to an organisation of an experienced manager or from the lawyer’s viewpoint, a ‘sophisticated’ client. Sophisticated clients understand why, when, and how to use legal services. Typically these clients have a legal, accounting or commercial background or have years of business experience to call upon. In the absence of such professional qualifications or experience then a legal risk management process can compensate and educate staff about legal risk and when to use legal services.

If your organisation is well managed and without such examples that does not mean that PL is of no use.  It is still a very effective tool to educate colleagues and staff and modify their behaviour to become better users of legal services. It can also collate a sophisticated data set about the business itself that can be used to identify risk hot spots and anticipate the need for more staff or funding or a need to review parts of the business.

A key component of my PL strategy is a self – assessment legal risk rating tool that is customised to the risk appetite of the business as determined by senior management.  A number of such tools can be created to reflect different aspects of business operations. For example a purchasing group that routinely spends a $1 million at a time via a well drafted standard contract will have a much lower legal risk profile than the marketing department wanting to spend the same amount on a sponsoring a sporting team.

With the benefit of my experience I can assist you to ensure a smooth translation of the PL strategy and process into your business.