As part of our blog series on the EU Commission’s (EC) Digital Fitness Check and a potential new EU legislative proposal, the Digital Fairness Act, we recently assessed the potential implications for General Terms and Conditions in our blogpost on ‘Unfair Contract Terms’.
“Automated Contracting” is another key issue under scrutiny in the Digital Fitness Check report and will likely be addressed in upcoming legislation. As regulators focus their attention to the increasing use of tech in (consumer) contract formation and execution, the regulatory process on the Digital Fairness Act is rapidly gaining traction, with a public consultation set to launch in the coming weeks. Businesses operating in this space should take the opportunity to closely examine the findings and potential new legislative proposals in this respect or weigh in based on their own experiences and perspectives.
Our blog series helps you to stay ahead of the curve and summarizes key findings and implications on the future legal framework not just on automated contracting but all major findings of the Digital Fairness Fitness Check.
I. What is “Automated Contracting”?
The Digital Fitness Check summarizes automated contracting as use of new technologies such as smart contracts and AI to conclude and perform contracts with varying degrees of human intervention.
In the B2C market, consumer shopping is one of the most prominent use cases of automated contracting. Existing examples include smart IoT devices that automatically reorder supplies (e.g. printer ink) and virtual assistants capable of making purchases or subscriptions based on predefined settings. Additionally, autonomous AI-powered systems, which are taking buying decisions independently of transaction-specific human intervention, may become more widely available in B2C markets.
The common denominator of the existing and emerging types of automated contracting is the streamlining of user consent and agreement through digital workflows. While automated contracting can lead to significant benefits for consumers and businesses alike and remove transaction inefficiencies, it also entails certain risks as further described below.
II. What are the main results of the Digital Fitness Check?
The Digital Fitness Check report points out that in light of the relatively limited market penetration of automated contracting tools in B2C markets data about “current consumer problems […] is limited”. Thus, the Digital Fitness Check mainly focusses on issues that may arise in case automated contracting tools are deployed more broadly in the (near) future.
Automated contracting entails (by nature) less user intervention than regular transactions. This could also result in unintended consequences or consumer confusion about the contractual obligations triggered “automatically”. The Fitness Check refers to a consumer survey wherein 15% of consumers indicated that they often experienced unintended purchases or contractual obligations (even in “regular” contracting settings). This perceived “loss of control” could further increase in more automated contracting settings. On the flip side, it seems safe to assume that many users of automated contracting systems will welcome the benefits of automation and the lower need to take active steps, as long as they retain control over the principal framework.
Another issue concerns the potential lack of transparency about key features of automated systems such as the identities or range of suppliers the tool interacts with and selection criteria used for choosing products and suppliers by the tool. This may not only be relevant on the level of individual consumers, but also for businesses: If automated contracting became more widespread in the future, intransparent selection criteria might affect the competitive landscape if companies are disadvantaged by algorithms and AI systems without justification. The Fitness Check further notes that risks may arise due “integrity breaches” of automation tools given that there are “broader concerns about a lack of transparency on how consumer’s personal data is used” – highlighting a broader risk of employing automated contracting tools rather than an actual contracting risk.
The Fitness Check recognizes that traders will generally welcome automated contracting as they have a commercial interest in the business generated through such contracts. It highlights, however, that this may not always be the case: Automated contracting may come with the increased risk of contracts not covered by a user’s consent which may then lead to challenges against the validity of contracts or contract termination. Some traders might therefore have an interest to prevent access of automation tools to their digital spaces or even reject use of automation tools and requesting explicit user consent.
Finally, the Fitness Check also points to several other studies undertaken to further assess the specific legal challenges by automated (AI) contracting such as the (forthcoming) EC studies on civil law rules applicable to smart contracts and novel forms of contracting in the digital economy (with a focus on AI) as well as the pending project by the European Law Institute to develop principles on algorithmic contracts. The rise of AI systems may become a “game changer” in the field of automated contracting. Therefore, the fast moving technical and regulatory environment regarding AI and AI liability will require close monitoring going forward.
III. Taking Action: Potential countermeasures
The existing and emerging EU legal framework (with the exception of the Data Act in a very narrow context) does not specifically tackle the automated contracting issues discussed in the Digital Fitness Check report. However, the Unfair Commercial Practices Directive (UCPD), the Consumer Rights Directive (CRD) and the Unfair Contract Terms Directive (UCTD) – key elements of the existing EU consumer law framework – have built-in a relatively high readiness for automated contracting in light of their technology neutral approach. Indeed, the Digital Fitness Check seems to propose a nuanced and targeted evolution and supplement of existing regulation rather than an overhaul of the regulatory framework or a distinct piece of legislation on automated contracting. It is also worth noting that the European Commission has signalled it may use international guidelines – like the 2024 UNCITRAL Model Law – as a basis for regulating automated contracting, while adapting existing rules to fit EU Member States’ specific needs.
Specific suggestions include
- additional transparency obligations such as an upfront disclosure of selection criteria of digital assistants in the CRD and UCPD;
- the right to use digital assistants and a duty to inform about the use of digital assistants;. and
- some additions to the unfair terms annex of the UCTD with a view to preventing “forced” automated contracting against the consumer’s will, limitations of the consumer’s freedom to select their digital assistant of choice and unjustified blocking or discrimination of digital assistant users.
Outside of consumer-specific laws, the Digital Fitness Check also suggests other measures such as an amendment of the e-Commerce Directive to explicitly cover automated contracting as an information society service.
Some ideas will prove to be tricky in their implementation: The Digital Fitness Check correctly points out that certain existing pre-contractual obligations such as information on the main characteristics and price of the product in question will raise specific challenges in automated contracting scenarios - as already showcased in German case law on so called physical device “dash button” solutions, where the courts found the “dash button” device did not appropriately inform consumers about the ordered goods and the price. Similarly, specific types of automated contracts pose additional challenges, in particular smart legal contracts could face difficulties complying with withdrawal rights or information rights (considering that a potential “code-only” smart contract may not necessarily be “clear and comprehensible” for an average consumer).
By contrast, other existing information/formal requirements such as the (virtual) “order button” on the online interface, are not relevant for automated contracts. Thus, traders allowing automated contracting should not be obligated to comply with such requirements.
In summary, some of the automated contracting issues discussed in the Digital Fitness Check have not yet manifested in the light of the early stage of automated contracting solutions. Due to the fast-evolving technical developments this may, however, change soon (for instance, contracting through AI assistants may become more common in the near future). Moreover, there may also be a certain need for de-regulation, i.e. exemptions for automated contracting/smart contracts from specific obligations, to allow for freedom of choice for consumers. Considering that regulatory uncertainty could be detrimental to innovation in this field and the rather specific proposals in the Digital Fitness Check, it seems likely that we will see at least a number of proposals specifically addressing automated contracting in the potential Digital Fairness Act.
With the public consultation fast approaching, it is a timely opportunity for businesses to pro-actively assess how the proposed legislative changes of the upcoming Digital Fairness Act (not only on automated contracting) could affect their markets. This will not only show of the impact on existing business models but would indicate whether there is a need to comment on the legislative proposals during the public consultation.
