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Following last month’s column on electronic signatures and digital contracts, Sarah Fox examines the potential of smart contracts.
As noted in April’s CM, the reform programme launched by the Law Commission in December 2017 includes two reviews which could help the UK’s construction industry: electronic signatures and digital contracts, which were examined last month, and “smart” contracts.
A smart contract is essentially a computerised protocol that negotiates, verifies and automates the performance of a contract. Advocates say they will increase trust and certainty – but there are a few barriers to overcome before construction can contemplate them. These include:
- The prevalence of implied terms and case law – as a common law country, all contracts are subject to terms implied by custom, cases and laws. These have to be explicitly written and coded into a smart contract.
- The inherent jurisdiction of the court to correct, substitute and overturn contract terms that are unclear, ambiguous or unlawful – the courts will not condone smart contracts which cannot be reviewed or monitored and which are therefore outside their jurisdiction.
- The lack of objective measures in quality – a computer cannot interpret “reasonable skill and care” or “best industry practice”.
- A variety of standard form contracts, none of which are digital – even electronic versions are viewed with suspicion in some quarters.
However, although construction has been a slow digital adopter, the advantages include:
- Faster negotiation and completion times – reducing the need for letters of intent or projects started without a contract in place.
- Self-executing contracts may resolve disputes by automating processes relating to variations, extensions of time, payment, change and risk management.
- Reduced need for independent monitoring as the contract is peer-to-peer controlled.
- A faster, more secure method of exchanging data for the project team. The technology would track materials, designs, BIM models, documents, contracts and payments.
Greater transparency could rebuild trust across the supply chain – which could have speeded up the process of reviewing the causes of and learning from incidents such as the Grenfell Tower fire and demise of Carillion.
Technology is coming and will eventually replace the wet-signed paper-based contracts that everyone loathes.
Sarah Fox is a writer and founder of contracts business 500 Words
