Legal Risk Legal Risk egal risk is financial risk from uncertainty in laws, regulations or legal actions. For example, in 1991, the United Kingdom's House of Lords determined that the London Borough of Hammersmith and Fulham lacked capacity to transact in derivatives linked to interest rates. Not only were contracts dating back to the mid-1980s with that borough declared void, contracts with over 130 other councils were effectively invalidated. In some jurisdictions there are issues relating to whether certain derivatives could be deemed gambling contracts and thus made unenforceable.
Legal risk can be a particular problem for institutions who transact business across borders.
Not only are they exposed to uncertainty relating to the laws of multiple jurisdictions, they also face uncertainty as to which jurisdiction will have authority over any particular legal issue.