Blockchain and smart contracts: Binary solutions in a non-binary industry?

March 12, 2018

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Legal expert and BIM specialist May Winfield examines the benefits, risk and future development of blockchain and smart contracts in construction

“The first generation of the digital revolution brought us the Internet of information. The second generation – powered by blockchain technology – is bringing us the Internet of value: a new platform to reshape the world of business and transform the old order of human affairs for the better… Trust is established through mass collaboration and clever code rather than by powerful intermediaries like governments and banks.” – Dan Tapscott, author of Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business and the World.

Blockchain has been proclaimed as a symbol of the Fourth Industrial Revolution – a disruptive technology that will likely become as ubiquitous as the internet. Sweden is considering placing their entire land registry system on a blockchain. While frequently referred to in the context of Bitcoin, blockchain and smart contracts are increasingly being considered to increase efficiency of BIM and digitisation within the construction industry.

Benefits and risks

Cost and security: The way blockchain and smart contracts function means there’s potential for a significant reduction in costs, as well as an increase in speed and security, making it harder to perpetrate fraud. The increased transparency of the data will likely have a positive knock-on effect of increasing trust and collaboration between parties.

The immutable nature of these technologies does not come without complications, however. They don’t readily allow for the flexibility of judgment required for tests of reasonableness or other agreed terms that require value judgments. Other practical questions also need to be addressed, such as the impact of termination on the data and the applicability of the Data Protection Act and the 2018 GDPR.

With multiple ecosystems and an absence of common standards, there is also the issue of differing quality controls, testing regimes, processes and procedures, as well as different terminology. If parties do not clarify the intended scope of use, risk allocation and processes for blockchain in their project from the outset, they could be opening up the real possibility of mismanaged and differing expectations and resulting disputes.

For smart contracts in particular, there is the added complication of the legal standing and applicable jurisdiction of a smart contract, if it was operating independently of a more traditional or standard contract.

Incorporating blockchain and smart contracts requirements into our contracts

Smart contracts could complement a ‘traditional’ contract well, although the interaction between the two forms of ‘contract’ would need to be carefully considered. Some commentators have suggested that the ‘traditional’ contract could be drafted to be a form of framework or umbrella within which the smart contract(s) operate. This would, however, depend on the scope of the smart contracts and the end result that the parties want to achieve.

Similar considerations apply to the incorporation of blockchain into a contract: in short, the blockchain and/or smart contract needs to work consistently and comprehensively with any other binding terms and conditions between the parties.

The standardisation of contract terms and documentation will no doubt develop over time but, in the meantime, if parties do wish to forge ahead in the use of blockchain and/or smart contracts for their projects, assuming this is going to be via incorporation into a more standard form of contract, what might such additional terms include?

Firstly, it would be sensible to get specialised legal advice to ensure any applicable regulations and legal requirements are complied with.

As regards the contract terms themselves, as with BIM, it would probably be helpful for parties to specify how blockchain and/or smart contracts will be utilised for the project, including during which part of the project, by whom and for what purpose. Security measures and interoperability mitigation steps would also be relevant.

As a final thought, how will the use of blockchain and smart contracts impact parties’ rights to claim additional costs, time and, in the case of NEC contracts, compensation events? Who bears the risk should they result in delays or increased costs to the project? In addition, what is the impact of insolvency or termination on the operation of the blockchain?

The future

In view of the growing attention and use of these technologies, the future likely does hold more specific standard form documentation, guidance and regulations governing both blockchain and smart contracts. As we have seen with BIM, in the event that blockchain and/or smart contracts meet with widespread use within our industry, standard documentation and practice will no doubt emerge.

Specific regulations are already starting to develop in some jurisdictions. In the US, there are a number of instances where blockchain and smart contracts have been given legal recognition via legislation and other means.

The European Commission ran a research project, #Blockchain4EU: Blockchain for Industrial Transformations, until February 2018, looking into the applications of blockchain for non-financial EU industrial sectors, which appears to have included consideration of specific legislation.

In the UK, a number of All-Party Parliamentary Groups (APPGs) have already been looking at blockchain, including a specific APPG Blockchain launched early this year.

Even the Lord Chief Justice of England & Wales, in a lecture in mid-2017, expressly recognised that the laws of England and Wales may need to be updated to take into account blockchain and smart contracts, noting that:

“Certainly, the European Commission takes the view that legislative change will be needed to deal with new forms of contract, such as blockchain and smart contracts. I have no doubt that we must consider whether our law (as it will then be) will need similar legislative updating.”

It will be exciting to see how this growing area develops over time.

** This article is for information purposes only and not for the purpose of providing legal advice. You should contact your legal advisors to obtain advice with respect to any particular issue or problem.**

May Winfield