Innovating Construction Law

Towards the Digital Age

Jim Mason

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000329094
• Edition: 1
• Topic: Law
• Subtopic: Construction Law
• Index: Law

Innovating Construction Law: Towards the Digital Age takes a speculative look at current and emerging technologies and examines how legal practice in the construction industry can best engage with the landscape they represent. The book builds the case for a legal approach based on transparency, traceability and collaboration in order to seize the opportunities presented by technologies such as smart contracts, blockchain, artificial intelligence, big data and building information modelling. The benefits these initiatives bring to the construction sector have the potential to provide economic, societal and environmental benefits as well as reducing the incidence of disputes.

The author uses a mixture of black letter law and socio-legal commentary to facilitate the discourse around procurement, law and technology. The sections of the book cover the AS IS position, the TO BE future position as predicted and the STEPS INBETWEEN, which can enable a real change in the industry. The rationale for this approach lies in ensuring that the developments are congruent with the existing frameworks provided by the law. The book proposes various steps that the industry should seriously consider taking from the current position to shape the future of the sector and ultimately create a better, more productive and sustainable construction industry.

This book is a readable and engaging guide for students and practitioners looking to learn more about construction law and its relationship with technology and for those seeking a platform for graduate studies in this area.

Section III
TO BE

4The smart contract in construction

Yogi Berra once said, “it’s tough to make predictions, especially about the future”¹ This joking truism counsels caution and a wait and see approach to predicted developments. This is particularly sage advice in the fast-paced world of technological innovation. However, part of the role of an academic is to future gaze and help to prepare the ground. The possibilities for new approaches to be adopted in the construction and engineering sectors currently feel limitless. Consequently, these are interesting times. This is partially because many of the innovations and initiatives have already made substantial progress in other industries; take, for example, robotics in vehicle manufacture. The leaders of today and tomorrow should therefore be exhorted to look to windward and set a course to deliver the improvements from which the construction industry has been missing out. A clear path now appears within reach through the medium of smart contracts and enhanced collaboration.

In 1965, the founder of Intel, Gordon Moore, predicted that every two years we would be able to double the number of transistors put on a computer chip. This theory has largely been proved and is still going strong and is predicted to hold true for decades. This is exponential or explosive growth. This is not just limited to processing power. Other technologies – hard disk capacity, internet traffic, bandwidth, magnetic data storage and random access memory – are also growing at similar rates.² This brute force processing power stored on a “cloud” offers seemingly limitless storage capacity, lightning quick communications, ever-greater miniaturisation and rapid decline in the cost of components. Smart contracts are one way of harnessing this massive potential.

Contracts are the currency of commerce. Insight into the future of commerce is likely to be gained through the application of smart contracts. The improvements in technology and the direction of travel for the collaborative agenda seem to coalescence around the concept of the smart contract. This vehicle can ultimately give an application for the distributed ledger technology (DLT) and crypto-currency about which so much noise has been generated in recent times. Here too, is an embodiment of collaboration – people trusting each other on a shared platform. This “To Be” section therefore explores the huge potential of the smart contract to be beneficial for the construction industry and to address some of its limitations discussed in chapter three. The legal infrastructure needs to be there to allow them to flourish. Opinions differ on the extent to which existing law can facilitate their adoption.

Lawyers and legal academics have become increasingly aware of the challenges and potential of smart contracts in recent years. Some commentators view them as business as usual³ whilst others see the end of contract law, as we know it.⁴ Movements also exist to do away with existing national laws and to start afresh in a system free of the traditional constraints and hierarchies. The author’s own view is that smart contracts can represent the paradigm shift previously discussed as the “helio-centric moment”. However, interaction with existing law is required, and is perfectly feasible, in order to harness the benefits on offer. One of the main advantages the new viewpoint will convey is the ability to rationalise and remove the ambiguities in the existing contract law arrangements.

Mentioning smart contracts to a construction professional is likely to draw from them notions around the automation of construction performance. The emphasis here is on how the smart contract will work in practice. From the lawyer’s perspective, this is not the challenge so much as how the contractual language can be formalised into being legally robust whilst being machine-readable. This is the key aspect of the definition of smart contracts.⁵

The term “smart contract” was first introduced by Nick Szabo in the early 1990s.⁶ However, it was only with the advent of blockchain and DLT that this concept gained widespread interest.

Szabo’s revolutionary idea was to embed contractual clauses in a digital entity (later to become DLT) with control over the property involved. The digital entity would use secure, machine-executable transaction protocols ensuring automatic performance of predefined, conditional actions in accordance with the contract clauses. Market demand and technology were not ready at that time to support this approach. They are now ready and able to provide the platform and to go further than Szabo’s original ideas.

The appeal of the smart contract is in its simplicity. Transaction costs and times are reduced by digitisation, the end users need not trouble themselves with the internal workings and risk allocation comes as standard. This standardisation is a result of the economies of scale involved in smart contracts. The contracts are reduced to simple earned value transactions and the terms become non-contentious in the pursuit of this basic formula. Having agreed the base lines, there is no need for bespoke amendments. This can be characterised as thousands of mini-contracts leading to an inch-stone progression towards completion. Each mini-contract is independent of the others and has clear functionality and execution. The extent of the automation may differ but even small steps towards this end offer huge benefits in time, cost and quality.

The potential is there to automate the complexity and leave the users with a straightforward transaction-based interaction, which is called “earned value” here. Party A pays Party B for the services and goods received based on the value generated to Party A. There is no need to refer the transaction to any other wider context or value calculation. This is a back to basics merely transactional approach suitable for common adoption insofar as the threshold for appreciating the functionality is much reduced and Hibberd’s goal of understanding is met. The latter will always be found wanting where complexity clouds understanding and judgment.

The idea that complexity should be automated where possible is replicated in popular apps such as Uber and Air BnB. Where everything is taken care of in the background, the participants are left to interact in the foreground in a mutually understood and convenient fashion. The passenger knows that the driver will receive a fair price and do not need to glance at the meter nervously as we sit in traffic. The host knows that the guests have been pre-vetted and have loyalty points and good reviews. The interaction is bound to be much more easily forthcoming and be pre-programmed to have trust and confidence in each other. This would render redundant the need for precedent as per Hibberd’s goals.

The key characteristics of smart contracts is it in digital form and is embedded as code in hardware and software. The performance of the contract and the release of payments and other actions are enabled by technology and rules-based operations. Lastly, the smart contract is irrevocable as once initiated, the outcomes for which a smart contract is encoded to perform cannot typically be stopped. Performance is automatic through a network of data sensors and automated ledgers. The quality-checking function can be augmented through using technologies currently being developed. In the short-to-medium term, this is likely to require continuing human involvement. Smart contracts probably require a building information modelling (BIM)-type model on which to base its assumptions as to the fulfilment of the planned versus actual performance. Another potential route for development is to be independent of BIM and take an app-type approach to smart contracts. This is a semi-automated position where the certifier takes images of the work and materials for checking. The checking is performed automatically together with the cursory manual inspection of the priority areas.

4.1The component parts

Smart contracts require the following as a minimum in order to function: BIM level 3 and beyond, crypto-currencies and the blockchain, big data/internet of things, and appropriate payment mechanisms and liability arrangements. A picture is worth a thousand words, so the saying goes, and Figure 4.1 has sought to convey the sense of smart contracts in construction to many different classes of students. The explanation starts with the picture and then breaks this down to the component parts as set out below.

Figure 4.1The components of a smart contract

The smart contract process can be described thus: the operative (whether human or robotic) inserts the brick in the wall. The presence of the brick is recorded by the sensor. The quality of the installation is checked against the desired criteria. The presence of the warranty information is verified and payment is released to the installer/supplier. The transactions can be recorded on a distributed ledger using blockchain technology. This can involve a brick-by-brick certification of completion if required – an “inch-stone” approach to building rather than the traditional milestone (Figure 4.2).

Figure 4.2Robot placing brick in the wall

The key characteristic of smart contracts is the coding of legal terms and processes into software. The result is that any contractual response is the outcome of a “rules-based” technological operation. Contractual responses are automatic once initiated and typically cannot be stopped (immutability) or reversed once commenced (Figure 4.3).

Figure 4.3IOT sensors pick up and record the brick’s presence

The “sensing” of the brick being in place is not a massive challenge for the construction industry. The insertion of the brick can be monitored by big data sensors or observed by an oracle. The challenge is in recording the work has been completed on the same platform as the smart contract operates. The brick placement must be sensed and recorded and its presence uploaded onto a DLT from, which the smart contract looks to for its single source of truth. The smart contract is not in itself sentient in that it does not know when the brick is in place. It must be told that this is the case via the ledger. The ledger can therefore be described as a specific configuration of technology components that records and tracks information in a dist...