On-Site Magazine

Bringing blockchain to the construction industry

Technology may automate processes and enhance trust between parties on projects.

April 21, 2022   By Rodney Smith, Marin Leci, Karleigh Maag and Celine Zhen
Law

Photo © Andrey Popov / Adobe Stock

Blockchain technology represents an efficient and transparent means of executing transactions. Often associated with cryptocurrencies, the technology offers significant opportunities for use in the construction industry as well, since construction contracts often contain monitoring rights and audit obligations. While the technology continues to develop, blockchain may be an effective tool in automating processes, while enhancing trust between parties on construction projects.

 

BLOCKCHAIN BASICS

A blockchain is a secure virtual, distributed ledger that stores and verifies data between multiple users operating the ledger together in real time. Each piece of information enters the blockchain through “nodes” and each node must be verified before it is added to the chain.

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APPLICATIONS OF BLOCKCHAIN IN CONSTRUCTION

Tracking materials, resources and equipment: Real time progress and material tracking is critical to construction projects. Using blockchain technology as a monitoring tool, parties could obtain verified, near-real-time information regarding the status of material and progress. This would remove the need to rely on agents or third-party reporting. In addition, it could significantly reduce the costs and disruptive impact of executing physical inspections.

As a result, parties to a construction contract built on top of a blockchain could pivot their operations more quickly to minimize losses and make decisions with a clearer picture on what project partners are doing. From a legal perspective, the ability to identify with certainty where and when a delay occurred can help resolve disputes over delay and decrease dispute resolution costs.

Smart contracts and data storage: Blockchain can be used to create a verified, immutable, and permanent data repository containing all project documents, including progress applications and project reports.

Using blockchain, parties executing a construction project could use a smart contract with self-executing processes triggered when stated conditions are met to govern the upload and access verified documents, in real time. Further, the ability to record key information such as the author, time of creation, or versions of documents, can facilitate compliance with legislative or regulatory requirements or a more efficient dispute resolution processes.

Using blockchain as the backbone of a document control system may ease adjusting to recently introduced prompt payment and adjudication timelines being implemented across Canada.

A blockchain-based data system may reduce costs related to investigating, prosecuting or defending legal claims, especially on large projects. Traditional methods of document storage may lead to disorganization, inaccuracies or data loss. As a result, costs associated with collecting, filtering and exchanging documents often make up a significant portion of legal costs in a dispute. Using blockchain to streamline document storage could translate into project execution efficiencies and significant cost savings during disputes.

Risks associated with using blockchain: Despite the advantages a blockchain can provide in construction contracts, there are some misconceptions about its accuracy and security.

For instance, blockchain is not 100 per cent hack-proof. Its security depends on the security of any overlying applications, and the identity of the users. Also, transactions are only as accurate as the “off-chain” information provided to the blockchain.

Lastly, given the rise in blockchain technology in recent years, parties must be cognizant of the quickly changing regulatory environment of blockchain technology. As such, its benefits and risks must be balanced by parties looking to apply the technology to a project or weave it into a contract.

 

LEGAL IMPLICATIONS

The use of blockchain technology raises a myriad of legal issues that have yet to be fully examined by lawmakers or legal experts. That said, in 2016, Vermont passed a bill making data registered in a blockchain admissible as evidence. Around the same time, Delaware amended legislation to allow businesses to keep corporate records and securities register on blockchain technology.

Despite these developments, it remains unclear what remedies would be available to users when errors occur, or how courts would interpret a code-based contract remains equally unclear.

Canadian law is sparse on this matter. In Cicada 137 LLC v. Medjedovic, the court queried whether the “[programming] code is law” when it comes to an open source technology like blockchain. In other words, should someone be allowed to take advantage of loopholes in the blockchain code, since that code is available for everyone to see?

As blockchain technology continues to develop, expect these issues to arise in the context of litigation.

 

Rodney Smith is a partner in the Construction Group at Borden Ladner Gervais LLP; Marin Leci and Karleigh Maag are senior associates at the firm; and Celine Zhen is an articling student, also at BLG LLP. This article provides an overview and is not intended to be exhaustive of the subject matter contained therein. Although care has been taken to ensure accuracy, this article should not be relied upon as legal advice.