Be prepared for smart contracts

The government’s new construction playbook identifies the use of digital tools and modern methods of construction (MMC) as being critical to achieving its objectives of a leaner, greener building sector. The industry cannot return to its old ways, having learned so much during the pandemic about how to build more effectively.

Contracts have a vital role to play in facilitating new ways of doing business. Many standard form contracts have their roots in precedents from the mid-20th century and in some cases much earlier. While all the leading standard forms have had a number of refreshes in recent years, and there are numerous comparatively new forms that incentivise continuous improvement and collaboration (such as the NEC4 Alliance Contract), none have been drafted specifically to support MMC.

As was seen in the case of Bennett (Construction) Ltd vs CMC MBS Ltd (formerly Verbus Systems) Ltd (2019), many parties are therefore amending the standard forms of contract to adapt them to the milestone payment process typical of MMC projects. However, a more radical approach is needed to reflect the very different construction process that MMC entails.

Compared with the traditional build methodology, MMC involves much greater reliance on standardised and automated offsite production and a much shorter period on site. While MMC contracts must still include appropriate provisions for the processes of site assembly, completion and defects rectification, they need more detailed provisions in relation to the activities of design co‑ordination and offsite manufacture to ensure a seamless process and a fully integrated product.

Smart contracts are recordings of a legal agreement in a language that is both human-intelligible and machine-readable

So-called smart contracts could have an important role in supporting the automated offsite processes at the heart of MCC. A recent definition of smart contracts by Dr Jason Allen (quoted in a lecture by Sir Geoffrey Vos, chancellor of the High Court and chair of the UK Jurisdiction Taskforce of the LawTech Delivery Panel) is that they are recordings of a legal agreement between parties in a language that is both human-intelligible and machine-readable, whose text incorporates an algorithm that automates some or all of the performance of the agreement.

The pandemic has already made the process of concluding contracts more reliant on technology, such that the virtual execution and exchange of contracts through dedicated online portals (or simply through email) has become the social distancing norm. Some have raised concerns that many contracts may have been executed incorrectly during the pandemic. However, as Sir Geoffrey Vos has emphasised, English law has always been adaptable to new ways of doing business and there is no reason in principle why courts will not enforce smart contracts provided all the necessary elements are present (offer, acceptance, intention to create legal relations and consideration).

Smart contracts could create a largely standardised platform for contracts between two or more parties to underpin the BIM process and the collaborative working relationships that will be required to realise the full benefits of MMC. During the production stage, the technological capability exists for sensors within widely distributed locations of manufacture, fabrication and site assembly to report back to the BIM model, allowing actual performance to be measured at those locations and rewarded in accordance with the payment provisions of the underlying smart contracts, with minimal human intervention. A benefit of this process is that smart contracts could facilitate the tracking of materials and the manufacturing process. This is one of the concerns the Association of British Insurers has raised in relation to the need for detailed “as-built” information for the purposes of the repairability, maintenance and modification of buildings constructed using MMC.

A year ago many would have seen smart contracts in the construction industry as pie in the sky. However, technological developments make it inevitable they will become widespread at some point, and the pandemic has probably brought that point forward. As we see smart contracts taken up in other sectors, notably finance, it would be sensible for all interested in modernising construction to watch developments in this field closely.

Tom Pemberton is a partner in the construction team at Goodman Derrick.