Adopting Smart Contracts in Construction: What are the Practical and Legal Issues in KSA?
Table of Contents
Background, Context, and Significance 3
Likely Drawbacks and Best Practices 5
Issues Arising from the Use of Smart Contracts 5
Justification of the Methodological Approach 9
The Original Contribution to Knowledge 1
Background, Context, and Significance
In the current sophisticated technological world, industries are slowly adopting some of the already enhanced organizational efficiency technologies. The construction industry is equally adopting new and emergent technologies such as 3D printing, drones, and digital modeling. Some of the construction bodies are already working towards solving or overcoming the myriad of challenges that are impeding the implementation of these new technologies and their impact on the construction industry (Gatteschi, Lamberti, and Demartini, 2019). Despite the initial lack of attention given to digitizing construction contracts, it is currently starting to take shape.
It follows that traditionally, or initially, the construction industry solely relied on a standard form of contracts that had been firmly rooted within the construction industry. This is borne out of the long-established procedures of contracting. It has always been mandated to follow certain contract-related rules within the industry. This was done to ensure that the terms spelled out in the contract suit the needs of the concerned parties, accommodate risks, and equally consider relevant programming and design information (Iyer, and Dannen, 2018). It has also been made crucial for the spelled terms to be considered and started by key players in administering contracts. However, there have been flaws within the process, a factor that has resulted in widely acknowledged disputes.
A recent paper by Hollie Escott and Jim Mason titled Smart contracts in construction: Views and perception of stakeholders noted on the dissatisfaction which have prevailed in the current contracting processes. The authors also noted the time-consuming and over-complex negotiation process and the consecutive amendment of standard forms, and the rather widened scope for corresponding contractual ambiguities, which increased the risk of disputes. The authors have noted the need to utilize smart contracts in many sectors, including the construction industry, with the view of shaping its future (Shojaei, 2019). Mascott and Escott have explained that blockchain technology and smart contracts have been utilized initially within the financial service industry and accelerate technological advancement (Shojaei, 2019).
The premise of the above is in the creation of automated contracts that have the ability to satisfy collective conditions in other industries. However, with blockchain technology, it is easier to record transactions involved because they can be stored in a distributed ledger. Also, smart contracts can highlight some of the common issues that industries need to address ahead of being commissioned within the construction industry (Powell, 2016). However, there is equally a need to raise awareness within the industry because findings had initially shown that there is fear for the unknown and, as a result, overwhelming doubt from key stakeholders on the possibility of full automation. Besides, there is a need to discuss the possibility of transposing these technologies into the construction industry in other countries, for all to benefit from the move’s positive outcomes. The authors also hinted that the use of smart contracts within the construction industry should be reviewed and include results from surveys in industry attitudes to collaborative working and technology.
Literature Review
Smart contracts have had many definitions. The first definition has smart contracts as promises spelled out in digital format. They also include certain protocols that involved parties perform based on the promises (Durovic, and Janssen, 2019). Another definition has hypothesized a smart contract as a legal agreement in the form of a recording between involved parties. It is written in both a machine-readable and human intelligible language (Durovic, and Janssen, 2019). Generally, the text should incorporate a system of protocols or algorithms that automate all or some of the agreement performance spelled out.
Generally, in smart contracts within the construction industry, the use of blockchain technology is in implementing the agreed terms and the administration of the contract and its subsequent costs (Gluodemans –Voogd, 2017). Therefore, the technology can be utilized in collecting and processing information on the development of the project. In the same manner, it is subject to the terms agreed upon as in terms of a code (Clement, 2019). This is arrived at by executing a detailed action. Technology can, therefore, be utilized on-site to record various types of information. For example, the technology could be utilized to monitor the time that site workers arrive, weather conditions at the site, track the progress of the project or build, and the time at which the ordered material arrived.
The above records can be collected and fed into a smart contract. The smart contract can automatically check the necessary or next cause of action that should be implemented relative to the contract’s terms (Hazard, and Haapio, 2017). This is based on a code, and afterward, the code can trigger an action. An example is where after materials have been successfully brought into the site and verified, an automated system payment can be sent out to the company distributing the materials or the point at which the materials were bought (Gatteschi, Lamberti, and Demartini, 2019). Therefore, it is clear that the utilization of smart contracts and their interrelated technologies can make the existent contracts within the construction industry redundant. Some of these technologies include project bank accounts and payment notices (Hoffmann, and Skwarek, 2019).
Likely Drawbacks and Best Practices
It is important to note or understand the basics of smart contracts and blockchain technology ahead of working with them. This is because the negotiation of smart contracts is not as it would be with typical contracts. This stems from the fact that certain work-related particulars are not necessarily automatable (Tai, 2019). Nevertheless, blockchain has a lot of benefits. But like any other technology, it has unique risks and drawbacks. An example is where a smart contract cannot eliminate human error when inputting or executing triggering events (Schrepel, 2019). One way of reducing the risks such as the one above is assuring that smart contracts and their causal software affords participating parties to actively claw-back or correct any mistake resulting from automation, especially those linked to payments (Tshibende, 2019). This allows organizations to determine the most efficient utilization of technology while minimizing risks relevant to smart contracts. Therefore, there are no questions that smart contract technology can lead to even greater efficiency, which translate to greater profits. However, it is pertinent to negotiate for a smart technology that minimizes the number of risks relevant to automation.
Issues Arising from the Use of Smart Contracts
However, several issues have recently been espoused ahead of ratifying the smart contracts technology within the construction industry (Powell, 2016). The first involves how smart contracts will be fused and operating within the construction industry sphere of operation (Shehata, 2018). There have also been concerns on how effective management of changes is the move from traditional construction contracts to smart contracts within the construction industry (Vigliotti, and Jones, 2020). The issue above was raised because survey results have initially indicated that older generations are worries that there would be a loss of initial specialist knowledge that would have initially been utilized in processes of contracting and redundancy of skills.
There have also been speculations if the smart contracts technology would have the ability to cause disputes. This is borne out of the question of whether a human being can intervene and resolve disputes. Additionally, there is the question if smart contracts can be able to standardize contracts, improve quality, reduce disputes and administration, and create trust (Schechtman, 2019). Based on the same, the question is that smart contracts might diminish the possibility of different interpretations of contractions, resulting in cutting out middlemen in administration (De Graaf, 2019). Equally, there is the question of whether smart contracts may lead to job losses within the construction industry and questioning if there is a need for administrators.
Issues have also arise from how construction contracts would be automated and how each would be made unique. There is also the question if the use of smart contracts can affect building of trust during the process of construction (Badi., et al. 20200. Similarly, there have been questions if parties may require investing heavily in building collaborations and trusting at the beginning of construction. Additionally, there is also a need to consider if a compromise would be created by semi-automation (Iyer, and Dannen, 2018). In addressing the issues above, it is expected that automation of some of the elements of contracts involved in construction would involve several repetitive processes. Equally, there is the issue of lawyers playing a part in facilitating changes to smart contracts especially within the construction industry.
Legal Issues
Apart from the above, there is also the question of setting up coding for this technology will foresee the industry under scope focusing on industry-wide problems that are recurrent. An example is the case of late-payment which has recurred from time to time (Allam, 2018). However, this would be simplified by having the parties involved being required to create, and therein accept a timetable that is robust for making payment (Shojaei, 2019). Having created the timetable no party should be guaranteed cash flow as contractors or employers have at the moment. A shift in approach and culture would therein be required. This is with market leaders having set the leap as well as committing resources for the training process.
Nevertheless, the hurdle would be when one of the parties fails to honor the contract. In such a case, there is a need to reconsider if there is a need for having legal representation (Hoffmann, and Skwarek, 2019). With the utilization of smart contracts technologies, legal issues that may arise may require a lot of consideration arising from their complexity (Schrepel, 2019). As identified by a team from the United Kingdom Jurisdiction taskforce, which involved developing artificial intelligence, smart contracts, and associated technologies, there were several issues concerning smart contracts relevant to the legal debacle (Tai, 2019). One of the key issues is whether common law may affect some of the required changes. This is related to reliance on the judicial arm, especially the court, to iron out legal issues through dispute resolution.
Research Questions or Aim
- Does the new smart contract technology itself cause disputes or affect the build-up of trust during the construction process? Are humans needed to resolve disputes?
- Will smart contracts cause job losses in the industry if administrators are needed? What role can lawyers play to facilitate change?
- What remedies in KSA will be available to users of smart contracts when things go wrong?
- Is a smart legal contract capable of giving rise to binding legal obligation, enforceable in accordance with its terms and Sharia law complaint?
Methodology
Methodological Approach
The methodological approach that this paper will take into context is the mixed methods methodological approach. Generally, the mixed method is a research approach where researchers collect and analyse both qualitative and quantitative data within the same research study (Hitlin, and Harkness, 2017). The basic principle behind this methodology is that its integration allows for a more synergistic and complete data application than separating qualitative and quantitative data analysis and collection. The research further involves rigorous procedures in both the analysis and collection of data. Additionally, it uses procedures that implement quantitative and qualitative components, either sequentially or concurrently, with either different or similar samples.
Data Collection
Three data collection methods will be relied on this study. They include survey, interviews, and case studies
Surveys
Surveys in this context refer to a set of questions which are aimed at gaining specific data or information from a certain group of people. Surveys can be conducted in several ways. For instance over the internet, mail, phone, and through face-to-face communications. Generally, the use of surveys as a data collection method is with the view of increasing the knowledge base in a specific field (Hitlin, and Harkness, 2017). In this context, the research will include an adequate number of participants within the industry who fall under the scope of study . In carrying out surveys, several questions relevant to the adoption of smart contracts will be posed to respondents.
Interviews
Also referred to as face-to-face surveys, interviews are one of the most common methods of collecting data. Essentially, this method of data collection is aimed at exploring responses obtained from people. This is usually done to gain deeper and insightful information on a particular subject. The use of interviews is used in the view of probing answers of respondents whilst observing their behaviour (Hitlin, and Harkness, 2017). This is a preferred method of data collection by many researchers owing to its numerous advantages. When utilizing interviews as a data collection method, the researcher must look into yielding more than enough information about the research study. This is borne out of the objectives and aims of the research. Because smart contracts are a new technology within the construction industry, a lot of insight must be obtained.
Case Studies
Case study refers to a research method that involves a rather in-depth, detailed, and up-close examination of a case on a specific case. An example, relevant to this case, is to examine how the smart contracts technology have been utilized in another country and look into how the same can be implemented in the Kingdom of Saudi Arabia (Hitlin, and Harkness, 2017). Case studies in most instances are obtained by looking into formal research methods. This study will rely on a single case study that may involve quantitative and qualitative research methods.
Data Analysis
Statistical Analysis
It involves both descriptive and inferential analysis (Hitlin, and Harkness, 2017). Descriptive analysis involves analysis of already completed data. It may show deviation and mean from a set of continuous data or frequency and percentage in the case of categorized data. For this study, descriptive analysis will be utilized on sets of continuous data gathered from the above data collection methods.
Text Analysis
This form of data analysis is utilized to uncover a given pattern from large sets of data. This is through many approaches, such as using data mining tools or databases (Hitlin, and Harkness, 2017). Essentially, this method transforms raw data into information. In the context of this research paper, it best applies to data collected from surveys and interviews.
Justification of the Methodological Approach
Various methods will be utilized in evaluating and justifying data. Some of the methods that will be utilized in this case may include regression analysis, stata, and charts.
Timeline
| Time Period | Anticipated Activities |
|
March 2021 – June 2021 |
In-depth reading around the topic in areas such as:
· Construction contract, Construction Technology, Saudi Public Construction Contract, and Saudi Public work contract |
| July 2021 – September 2021 | In-depth reading around the topic in areas such as:
· Saudi legal system, and dispute resolution · Blockchain technology, and smart contract technology |
| September 2021 – December 2021 | Carry out more research |
| January 2022 – May 2022 | · Preparation and drafting of Literature Review
· Begin looking for interviewees, and survey participants |
| June 2022 – August 2022 | Data collection begins |
| September 2022 – December 2022 | Data Collection Continues |
| January 2023 – April 2023 | Data collection completed |
| May 2023 – July 2023 | Initial attempts of Data Analysis begin |
| August 2023 – September 2023 | Data Analysis continues |
| September 2023 – October 2023 | Data Analysis continues |
| October 2023 | Data Analysis completed |
| November 2023 – January 2024 | Begin planning write up |
| February 2024 – March 2024 | Final Write up begins |
| March 2022 – April 2022 | Final Write up continues |
| April 2022 – June 2022 | Completion of Final Write up |
The Original Contribution to Knowledge
The research paper will give a deeper insightful and analytical perspective around the utilization of smart contracts within the construction industry. This is by first exemplifying its applicability within the construction industry in general. From a deeper perspective, the paper will try to explain how Smart Contracts can be applied in the Saudi Arabian construction industry. This is by giving prescriptions on how smart contracts can be incorporated within Sharia law. Because of the reality that disputes due to smart contracts are a likelihood, there is a need to explore how Sharia law relates or can incorporate disputes arising from smart contracts technology in the construction industry and the economy. Furthermore, this paper provides a wider knowledge base, and as a result, room for further exploration of the subject.
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