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Thoughts for the new decade: smart contracts, blockchain and construction dispute resolution

At the start of a new decade where automated, self-executing smart contracts are likely to become more commonplace, perhaps also in the construction sector, it is interesting to consider how such a development might impact construction dispute resolution processes. A smart contract is simply a computer protocol intended to facilitate, verify and enforce performance of a contract. In short, it is about contract law and related business practices being facilitated through the design of electronic commerce protocols. Understanding the role blockchain technologies can play in this context is key.

Notwithstanding the general success of construction adjudication as an interim form of construction dispute resolution, almost all final determination forms of construction dispute resolution remain lengthy and costly processes for all those involved. Marginal net economic wins even for the “successful” party regularly lead to both parties feeling dissatisfaction by the time the dispute is resolved. Even in the case of adjudication – and alternative dispute resolution processes – sunk costs can often feel disproportionate to the sums disputed, and there is an appetite for cheaper, swifter solutions – especially to resolving more straightforward and lower value claims.

Reducing the scope for disputes

The use of smart contracts in the construction sector could help resolve many issues at contract inception, prior to any dispute crystallising, by reducing the scope for disputes through the use of smoother, objective contract administration and automated payment processes, facilitated in whole or in part by the use of distributed ledger technology (for example, blockchain). The source of numerous construction disputes can be traced back to parties’ basic misunderstanding of the contract they have entered into, compounded by a range of contract administration failures or errors. Smart contracts have the capability to function as unbiased, trustworthy and consistent contract administrators, resulting in a reduced margin for error and increased transparency. But new technologies are also poised to impact dispute resolution much more broadly through developments in online dispute resolution, crowd-sourced justice platforms and AI-powered dispute resolution solutions.

Where rules are embedded into smart contracts, lawyers will no longer need to draw clients’ attention to circumstances of legal significance – decisions will be made autonomously in line with agreed rules. Self-executing contracts will initiate actions and automatically execute processes and provisions, limiting the need for human input. This could mean automating the transfer of title to a buyer on receipt of payment or automating the occurrence of digital actions in the event of a breach or failed performance. Such enhanced efficiency and increased transparency should help reduce the scope for dispute between parties.

Information within the smart contract will be captured and registered on a distributed ledger between the relevant parties, producing a robust and reliable audit trail of past events that will reduce scope for disagreement if and when a dispute does arise, as the ledger will provide a clear record of contract events from an unbiased perspective. Such contracts would further avoid many of the current snags and disagreements that result from contract non-compliance and misinterpretation throughout the life-cycle of the project.

Parties will need to ensure that such contracts are correctly programmed but, once in place, they clearly have the potential to materially reduce human error and contract non-compliance. However developing the smart construction contract in the first place will be no small undertaking – standard construction contracts need to provide for risk allocation and administration of a wide range of physical, economic and legal issues. I do not see a JCT “smart contract” being in place this decade, albeit I would love to be proven wrong…

Ultimately, the digitisation of contracts and increased reliance on data may also breed new types of disputes arising out of smart contracts. Parties may challenge the legitimacy of the algorithmic decision making, or sue the programmers responsible for its development.

Why blockchain technology is key

A blockchain is a continuously growing list of records (known as “blocks”) that are secured together using strong cryptography. Each individual “block” contains a link to a previous block, a timestamp and other transaction-related data. Blockchains are, by design, extremely secure and highly resistant to any modification of the data they contain. The key thing is that they are managed by peer-to-peer networks, and any attempt to retrospectively alter data in any one block requires changes to be made to all the subsequently generated blocks. This is something that would require collusion of the majority of the network and is therefore almost impossible to achieve. As such, blockchain technology can be used to create open, distributed ledgers recording transactions between parties in a highly efficient, auditable and permanent way.

Blockchain technology can therefore help enable trust in environments where it might otherwise be lacking. It is not hard to see potential uses for an undisputed record of actions and facts, captured in real time, and not capable of revisionist/subjective reinterpretation in a sector such as construction.

UK construction is a highly regulated and data generating environment, with numerous compliance verification steps to be recorded across multiple data paths. Payment records, regulatory certifications, delay and disruption events, and programme critical path impacts immediately spring to mind. In that context, it is hard to imagine a future for our sector which does not involve embracing blockchain technology and processes once they are adapted to the data needs of our sector. The potential for tie-in with BIM technologies is also clear.

Beyond recording value exchange, and certifying proof of existence of different types of data, blockchain technology will assist in enabling the administration of “smart contracts” and the creation of decentralised autonomous organisations – created by combining smart contracts.

Blockchain technology has the potential to contribute seriously to how we restructure design, procurement, occupation and management of the whole built environment. The verifiable decentralised and permissionless manner in which data is captured ought to support the adoption and operation of a circular economy. As we progress to an “internet of things”, we will find ourselves increasingly needing a “ledger of things” – and it is hard to imagine that role not being played by blockchain technology at some point in that future.

Transforming existing court and tribunal systems

From a lay perspective, court systems can appear time-consuming, unjustifiably combative and inexplicably steeped in opaque procedure and language. Revolutionising the courts with the use of technology could ensure inexpensive, swift, proportionate and inclusive dispute resolution.

But many of the technological advances applicable to courts are “sustaining” rather than “disruptive” technologies. Giving judges laptops, improving AV in courts, and using ipads rather than traditional paper court bundles for document referencing simply makes existing court processes more efficient. The critical exception may be online dispute resolution (ODR). ODR has the potential to challenge the conventional court based judicial role. ODR goes a step beyond a virtual courtroom, to a dispute resolution process where the formulation of the solution is entirely or largely enabled by technology, with a “court” becoming a service rather than a place.

Examples of technological reform within the courts can already be seen in a variety of different jurisdictions:

  • In the UAE, the Dubai International Financial Centre’s Small Claims Tribunal hears claims of up to £104,000. Parties are required to file electronically (via CaseLines) and may appear from anywhere in the world. The courts have developed their own case management system. Future plans include the use of blockchain to authenticate judgments for enforcement in other jurisdictions and to enable the court to rule on disputes involving smart contracts. Abu Dhabi offers a similar, rival set-up – the Abu Dhabi Global Market Courts.
  • In British Columbia, Canada, the Civil Resolution Tribunal offers an ODR process for certain claims of low value and low complexity, involving companies established in BC. Its jurisdiction includes traffic accident claims, cooperative association claims and company disputes. Hong Kong has also indicated support for funding the development of an online arbitration and mediation platform (“eBRAM”), and a budget has been allocated. The proposed electronic platform would provide ODR services in relation to international disputes.
  • There are also examples of failed attempts at state-sponsored ODR, such as the Netherlands’ Rechtwijzer, which was set up in 2014 to deal with landlord and tenant disputes, debt and divorce. The latter was shut down in March 2017 as it proved financially unsustainable. A second attempt (Justice42), focusing primarily on the divorce market, is in the works. In a 2017 lecture following Rechtwijzer’s decline, Sir Terence Etheron cautioned fundamental differences between the Rechtwijzer and the UK’s proposed Online Solutions Court – whereas the Dutch system attempted to set up an online alternative to the court systems, the UK solution proposes an integrated approach incorporating ODR into existing processes.

Ultimately, online courts could result in substantial costs savings both for litigants and the court system itself, leading to an increasingly accessible, user-friendly system, especially appropriate for lower value claims.

Other alternatives to traditional dispute resolution

Technology-powered alternatives to traditional dispute resolution are also increasingly making an appearance. These mostly take the shape of private-sector funded dispute resolution platforms which rely on blockchain technology and varying levels of human input. Some utilise “crowd-sourced justice” whilst others apply AI-based diagnostic tools and predictive forecasting, mostly based on statistical analysis of past court behaviour:

  • Kleros, a decentralised adjudication system, is an example of such a platform. It proposes “fast, open and affordable justice for all” in the form of a quasi-judicial online court system. The peer to peer platform uses crowdsourcing and blockchain to put the dispute resolution process in the hands of the community. Members of the public can sign up as jurors and are then selected by the system and appointed to jury panels.
  • Mattereum’s decentralised dispute resolution and enforcement platform was developed to assist clients in the design and implementation of dispute resolution and enforcement systems in the context of self-executing smart contracts, and natural-language contracts incorporating smart contract code.
  • CodeLegit is an auditing tool designed to verify compliance by carrying out technological compliance audits in conjunction with leading law firms. It purports to ensure technological compliance and bridge the gap between technology and law by auditing compliance of software code. It also offers ready-made smart contracts fitted with its own arbitration certificate, and has even drafted a set of Blockchain Arbitration Rules.
  • Oath Protocol, another newcomer, is a crowd-sourced dispute platform relying on a large, diverse juror pool and incentive systems, modeled on the common law jury system. The platform will rely on community decision-making and engagement from blockchain users.

Most of these systems remain in beta testing mode and/or development, and a number of technical and legal obstacles remain to be overcome. Some of these tools are already enhancing judicial processes today while other applications of such technology are set to disrupt the dispute resolution sector more fundamentally. As we have already seen in relation to transactional drafting and due diligence, AI can assist parties to craft dispute provisions which are fit for purpose and tailored to the parties’ needs, using machine learning tools to collate all the relevant factors. These include aggregating drafting and drafting analysis from vast quantities of similar contracts, and the advice given around them when being negotiated. Whether, or when, we will see AI enhanced dispute resolution platforms start to aggregate data from past arbitrations and judgments and apply a level of “reasoning” to the facts of the instant dispute in front them is an interesting question to ponder. This may sound completely far-fetched to some – or frankly dystopian to today’s senior lawyers. But for younger lawyers, it is worth remembering that if Moore’s Law was to hold for another 40 years (an admittedly big assumption, albeit it has done so for the past 45 years – since 1975 when Gordon Moore revised his forecast to a doubling of processor speeds every two years) the processing power available to support such advanced AI based systems then will be approximately one million times more powerful than that available today.

This article was first published as a blog by Practical Law Construction on 14 January 2020 and written by David Savage. For more information, please contact David at david.savage@crsblaw.com or on +44 (0)1483 252 614.

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