When your hire a contractor, you’re probably focusing on:
Unless you’re a bit of an Eeyore, you’re probably not thinking about potential lawsuits, but maybe you should. It only takes one unhappy client to trigger a suit, and when a contractor is involved, an already messy legal battle can get even more complicated. The chain of liability makes it possible for anyone associated with the project to be named in the lawsuit. Fun!
Here are some ways you can minimize your risk: research the contractor before you hire, use contracts, and make sure your contractors are properly insured.
Before entering into a contract with anyone, make sure you feel confident in the abilities of the contractor you’re hiring. Check out “Hiring Freelancers / Contractors? Do These 5 Things First” for tips on how to hire wisely.
“The best way to avoid litigation is to do your homework on who you are doing business with,” says attorney Randy Zelin (@RandyZelinNews). “Do business with someone who takes your business as much to heart as you do.”
Maybe you like to keep things casual in your office. You even have a fully stocked beer fridge to prove it. But using contracts doesn’t make you a stickler – it makes you a smart business owner.
So before you hire anyone, sit down with a business attorney if possible, and work with them to draft the contract you’ll use with your contractor. It should outline the scope of the project, as well as who is liable for what.
“The biggest mistake by far is not having clear contracts that define the role of the contractor (whether a company or individual) and the company,” says William Heyman (@bill_heyman), business attorney and founder of The Law Office of William S. Heyman. “People try to save money on legal fees going into a relationship, not realizing that if problems occur, there will not be a framework to resolve them.”
When creating a contract, make sure you define the contractor’s role at both your business and the client’s, as well as what work they are expected to perform.
“The business owner needs to make sure that the freelancer has clear deliverables and that the contract gives the business owner wide discretion to terminate the contract in the event of failure to perform,” says Heyman, who also recommends including nondisclosure provisions to protect your or your client’s intellectual property.
As we mentioned earlier, when a project goes wrong, sometimes a client may sue anybody involved with the project. For example, say you were hired to develop an app for a client, and you hired some contractors to help. Because of a lot of technical issues, you deliver the app late and it still has some bugs.
Your client might sue…
This is what’s known as the chain of liability, which can result in a legal free-for-all as a client sues everybody they can in an attempt to recoup their losses.
“Typically, the strategy is to sue everyone and leave it to the defendants to sort it out,” says Zelin. “The defendants will have indemnity provisions so they can claim against each other. At the end of the day, whoever has the deepest pockets or the best insurance will be most appetizing to the plaintiff.”
Sometimes you will be the only one sued, and then it’s up to you to potentially sue your contractor if their work sparked the ordeal.
“Generally, in a case like this, the vendor would be sued. The contractor might be added as a defendant, but not always because the vendor is responsible for the work of its agent as long as the agent is working within the scope of its agency,” says Heyman. “The vendor would then file a claim against the contractor for indemnification. One major issue for vendors, however, is that freelancers may not have the funds to allow the vendor to recoup any damages that it is required to pay the plaintiff.”
For this reason, Heyman recommends requiring any contractors you hire to carry contractor insurance, such as Errors and Omissions Insurance, which covers their professional errors, and General Liability Insurance, which can help pay for any accidental property damage they cause while working at your client’s office.
If you end up embroiled in a lawsuit, Heyman recommends you…
Lawsuits, while not a pleasant experience, don’t have to be the end of the world. Take steps to protect your business by: