Smart legal contracts – are they for the construction industry?

Published 31 marzo 2022

What are smart legal contracts?

Smart legal contracts are a subset of smart contracts.

A smart contract is a computer program (i.e. a set of instructions in the form of code) which runs automatically, in whole or in part, without human intervention. A smart legal contract is simply a smart contract where the code also includes a binding legal contract.

The Law Commission¹ has defined a smart legal contract as “a legally binding contract in which some or all of the contractual obligations are defined in and/ or performed automatically by a computer program.”

Smart contracts are already a well-established part of modern life, for example, standing orders and automated payments are smart contracts.

Smart legal contracts work on similar principles, but all have the following three core² features:

(i) Some or all of the contractual obligations are performed automatically by a computer programme;

(ii) The contract is legally enforceable; and

(iii) The computer programme is deployable on a distributed leger (e.g. Blockchain).

The main benefit of automating a contractual obligation is that it means performance of the contract can occur without the need for human intervention. Unlike a person, a properly coded computer programme cannot refuse to act or fail to perform once the conditions for performance are met.

Contractual obligations which follow a conditional logic (If X, then Y) are good candidates for being drafted in code as this logic is inherent in computer programming.

Other contractual obligations may not be suitable for automation because they are not based on conditional logic and would therefore be difficult to translate into code. These obligations might require the exercise of discretion, reasonableness, best endeavours or some other form of an individual’s judgment.

Why are we talking about them?

The Law Commission has recently completed its review of how current contract law applies to smart legal contracts. In a nutshell, the Law Commission has concluded that the Laws of England & Wales are strong yet flexible enough to readily adapt to the use of smart legal contracts. That being said, a period of “bedding in” is expected where some changes and adaptions will no doubt be necessary.

The Law Commission has flagged that formation of smart legal contracts, interpretation, remedies and jurisdiction / governing law are all areas which could pose challenges to and / or require changes and adaptions in the law as use of smart legal contracts becomes more common place.

That being said, following publication of the report and as the technology underpinning smart legal contracts becomes increasingly sophisticated, the use of smart legal contracts is anticipated to expand as various sectors seek to take advantage of the automatic processes that they can offer. The Law Commission itself says that “smart legal contracts are expected to revolutionise the way we do business”.

What use could they have in the construction industry?

The advantages being reported by users of smart legal contracts include: autonomy – removing the need for intermediaries; security – documents are encrypted and saved on the blockchain; speed – time is saved manually processing contract documents; savings – on intermediaries, processing, etc.; accuracy – errors in manually filled out documents can be avoided; audit trial – the documents and records are recorded in real time, stored and saved, which in turn could simplify resolution of claims and disputes.

They are increasingly being considered by contracting parties as a means of automating specific processes within conventional contracts, from payment of insurance claims to escrow arrangements to managing supply chains.

In terms of the construction industry, it is not farfetched to imagine that a smart construction contract could implement a number of the terms and/or administer the contract and its costs. For example, technology could be used to verify site records; when a worker clocks in and out, weather conditions or materials on site. This information could then be automatically fed into the smart contract’s code and a payment made / verified based on the information received.

There is no doubt that smart legal contracts are still in their infancy, with their technological advancement certainly at the forefront of the financial services industry rather than other sectors. However, with the backing of the Law Commission and the pace of development of the technologies in this area, the time when there a smart “features” or even fully smart construction contracts is drawing closer.

1 The Law Commission, Smart legal contracts: Advice to Government - Glossary
2 The Law Commission, Smart legal contracts: Advice to Government – Features of a Smart Legal Contract