Outsourcing-Insulation from Liability

After the presentations this week, we discussed outsourcing as a tool businesses use to insulate themselves from liability.  The classic example of this is the cab company.  Most cab companies operate simply as dispatchers who maintain contractual relationships with the drivers of the cabs.  Each cab driver is an independent contractor as opposed to an employee of the cab company they work for.  With this arrangement in place, it is each driver (not the cab company he or she works for) that bears responsibility for the accidents that the cab is involved in.  This increases the awareness of the driver, because he will personally have to pay for any damage he causes, and also significantly reduces the costs of cab companies because they aren't required to pay for the negligence of their drivers.

This is the same strategy that BP employed with the Deep Sea Horizon rig.  The general rule of law is that businesses are not responsible for the damages caused by their independent contractors.  The exception to this rule, however, is that businesses ARE responsible for the damages caused by their independent contractors while engaged in "ultrahazardous activities".  Ultrahazardous activities is a legal label that is not easily definable.  Deciding whether an activity is ultrahazardous depends upon the nature of the activity, the appropriateness of the activity for the place it is being engaged in, and finally (and most importantly) whether the exercise of due care can prevent the kind of damage that took place.  The idea behind this is that you don't want companies to be able engage in incredibly dangerous activities without the possibility of having to pay for them just because they hire independent contractors.

The problem for BP is that it would be very easy to convince most people that maintaining a deepwater well is an ultrahazardous activity.  No matter how safely the well was maintained, there is no way to completely forestall the kind of disaster that took place because of the difficulty involved with stopping the flow of oil from a well that far under the ocean's surface.  So in this situation, BP's outsourcing arrangement probably isn't going to help them very much.

So if a company is utilizing outsourcing to insulate themselves from liability, an important thing they have to do is consult their lawyers and figure out whether the activities that are being engaged in are ultrahazardous or not.  A good rule of thumb is that is it probably ultrahazardous if it involves any kind of uncontrollable explosions.  If the activity is ultrahazardous, outsourcing may be a waste of your time.