If I understand correctly, one concern is that because you provided the decision to stop the project, which could result in the fact that the previous contractor would loose its job and its employer may decide to not pay the rest of his bills, that you can be sued by that contractor. If that is one concern, you don't have anything to worry about as you simply did you work based on your employer task list. So, if that would happen, any lawyer could within a few minutes provides justification that you have no direct relation with the contractor, that you followed a task list based on your assignment and that you did what you had to do.

Now, as far as his image goes, where he could state that because of your decision, that he could loose potential upcoming contracts, well, this again is in reference to point 1. It's the same thing as an employer who would fire an employee because of lack of competence. Then, he wouldn't be able to provide good reference. But, that's how it is.