Landmark ruling may reduce contractors share of risk for project failures

A landmark ruling that means employers can now be liable for the negligence or misbehaviour of another companyís workers could reduce contractorsí share of risk for project failures, says giant group plc, the contractors services provider.

According to giant, the ruling could apply to contractors working under the direction of client organisations or external project management consultancies, such as are commonly used on large scale IT and engineering projects.

The case in question, decided by the Court of Appeal, ruled that a project manager and its subcontractor were both jointly liable for a flood caused at a factory by one of the subcontractorís workers. Ordinarily, the subcontractor would be liable for the negligence of its own worker, but the court took the unprecedented view that the project manager should pay half the damages to the factory owner, establishing the principle of dual liability.

Matthew Brown, Managing Director, giant group, comments: This is a significant case that directly impacts on sectors like IT and engineering where personal service, managed limited and umbrella companies are project managed, whether by the client itself or an external project management consultancy.

In future, if contractors are sued for negligence, courts may take the view that the liability should be shared with other parties working on the project, reducing contractorsí share of the damages to be paid out.

According to giant, the amount of control exercised over the negligent contractor by other parties will be a relevant factor in determining whether joint liability applies.

If the contractor is being directed or project managed in such a way that contributes towards the negligent act, courts may now decide to invoke the principle of dual liability and divide the damages between the contractor and project manager.

If the project manager allows contractors to use its equipment, this may also make it partly responsible for contractorsí negligent acts, giant points out.

Working practices on large projects where work is routinely subcontracted may have to change. In future, clients and their project management consultancies may be inclined to take a more ëhands offí approach to how they manage contractors and ensure they are treated as separate and independent businesses, says Matthew Brown.

Having a high level of professional indemnity (PI) cover should cover the cost of any damages resulting from negligence claims. According to giant, contractors should ensure their umbrella or managed limited company provider ideally has 2 million worth of PI cover, 1 million being the absolute minimum insurance safety net.

Ruling may clarify contractorsí IR35 status

Kevin Barrow, Managing Partner of City law firm Tarlo Lyons, believes that a knock-on effect of the ruling may be that contractorsí claims to be outside IR35 are enhanced.

He says: Rather than complicated claims involving multiple parties, in practice what we are likely to see is contractors being asked to indemnify other parties against the risk that they may be jointly liable for contractorsí negligence.

This may help contractors from an IR35 point of view. By taking the risk of being sued on their own shoulders, contractors will be able to make a better case that they are legitimate businesses in their own right.

Indemnities may have insurance implications

Insurance broker Jardine Lloyd Thompson says that contractors should consult with their insurance provider before agreeing to contractual clauses that indemnify other parties for negligence.

Tina Cant, Managing Director of Jardine Lloyd Thompson Professional Risks, comments: Insurers may re-evaluate their risks in the light of this ruling and any contractual exclusions that are agreed between parties, which could have implications for premiums.