A smart contract means a ‘computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.’ [source]
From this definition, a smart contract is just the code – it has been said that it is neither smart nor a contract! More recently, the Law Commission for England and Wales used this view of smart contracts: legally binding contracts in which some or all of the terms are recorded in or performed by a computer program deployed on a distributed ledger.
There are 3 key stages in the process of contracting:
- plan (inception): from verification to tendering
- make (creation): from contract choice to award/completion
- use (operation): from contract to dispute management
Smart contracts can deal with all these stages of the process. A smart contract is created using a mix of both natural language and machine-readable language. The developer would create the machine-readable elements and launch it onto a platform which would enable the parties to execute the agreement. The platform would digitally enforce performance. While doing these tasks, the platform will also collect data…
I have spent the last 25 years planning and creating construction contracts. The legal terms reflected in those contracts are a very small part of the documentation that needs to be signed and agreed by the project team. A construction contract also needs:
- articles of agreement – the contract overview
- contract particulars or data – the project overview
- specifications, drawings and data – the details for the works, goods and services (and bills of quantities where used)
- pricing information including rates, analyses and so on
- information, communication and BIM protocols – to help the supply network work seamlessly together
- works programme(s) and schedules
- statutory information eg the construction phase plan where CDM 2015 applies
- miscellaneous documents like bonds, guarantees, extracts from third party agreements, policies, procedures and so on.
Intelligent contract platforms can help the parties create, negotiate, sign and then manage the terms of the contract digitall, but based on natural language. Smart contract platforms would automate certain processes using machine-readable language once the contract has been signed.
However, until all documents relating to the project can be created, stored, indexed and recovered digitally, the prevalence of paper-based wet-signed complex contracts will continue to blight the industry.
Intelligent contracts ie platforms based on natural language content, would make it easier to plan, negotiate, create and sign contracts as the platform can:
- track the negotiation of clauses (as one document and individual clauses; also compare against existing clause banks)
- log telephone calls, tasks, appointments, emails and correspondence relating to contract negotiations
- propose alternative clauses, set walk-away positions as well as options for standard positions
- automatically send contracts and contract documents to the relevant person to authorise (according to pre-set delegations and permissions)
- allow contracts and relevant records to be signed digitally (by staff with relevant authority)
- store and record all relevant works documents (and their approved updates) with version control and a full log of when documents are accessed.
These benefits will mostly be felt by the lawyers and procurement teams responsible for the pre-contract mechanisms. But what about the project teams who actually do and manage the works?
Smarter project management?
Smart contracts can only enforce performance which follows computational logic (if, then, else). That seems perfect for binary transactions such as the delivery of a single package of goods to site. But it lacks the nuance needed for most construction contracts.
Intelligent contracts or contract management platforms can do more. They can:
- extract obligations for the parties
- send, store and record changes to the project, works or tasks
- track time and money expenditure on specific items of works
- track programme changes and their causes
- automate payments
- automate certificates (once completion or take over criteria are measurable)
- automate awards for extra time or money
- create audit trails for claims
- log minutes of meetings
- log permissions, instructions, orders, directions of the contract administrator(s).
What should you do?
The future of contracting is using technology to simplify the contract process and the administration of a project, to build trust, avoid disputes and start a project quicker.
But before you rush to automate, check that your contracts and their processes are simple, digitally-enabled, and fair. There is no point automating rubbish!
Originally posted September 2016. Updated June 2021