Artificial Intelligence Contract Formation in Malta. The legal Framework and the Challenges

Introduction

Electronic contracts and electronic signatures have become an integral part of modern commerce, facilitating faster and more efficient transactions. In Malta, the legal framework governing electronic contracts is primarily established by the Electronic Commerce Act (Chapter 426 of the Laws of Malta), which aligns with the European Union’s eIDAS Regulation (Regulation (EU) No 910/2014). This article explores the legal intricacies, challenges, and implications of electronic contracts in Malta, particularly in the emerging environment of contracts formed by artificial intelligence (AI).

Legal Framework for Electronic Contracts

The Electronic Commerce Act recognises the validity of electronic contracts and electronic signatures in Malta, and provides that these possess the same legal validity as written contracts or signatures. However, their application is not universal. The Electronic Commerce Act stipulates specific exclusions in Schedule five, where consent for certain contracts is governed by other laws. These exclusions include:

1. Contracts that create or transfer rights over immovable property, excluding leasing rights.
2. Suretyship contracts and collateral security agreements made by individuals acting outside their trade, business, or profession.
3. Laws pertaining to the creation, execution, amendment, variation, or revocation of wills, testamentary instruments, or trusts.
4. Laws governing the making of affidavits or solemn declarations, or those requiring or permitting their use for any purpose.
5. Rules, practices, or procedures of a court or tribunal, and laws related to the giving of evidence in criminal proceedings.
6. Contracts governed by Family Law.

Additionally, matters involving taxation and gaming transactions, such as lotteries and betting, fall outside the scope of the Electronic Commerce Act. For all other contracts not listed in Schedule V and not subject to specific legal requirements, electronic contracts and signatures are generally accepted.

Requirements for a Valid Contract under Maltese Law

For a contract to be valid in Malta, whether traditional or electronic, it must meet specific conditions outlined in the Maltese Civil Code:

1. Capacity of Parties: All parties must have the legal capacity to contract, meaning they are not under any legal disability.
2. Consent: Consent must be given freely and knowingly, without error, violence, or fraud.
3. Subject Matter: The contract must pertain to a definite subject matter.
4. Lawful Consideration: The contract must have a reason, and that reason must be lawful.

Challenges in AI Contract Formation

The use of AI in contract formation presents unique challenges, particularly in fulfilling the traditional requirements of a contract. The first legal hurdle in AI contract formation is in ensuring that the parties truly consent to what is being generated. AI systems, regardless of their level of autonomy, do not qualify as persons capable of contracting under Maltese law. For AI systems to be considered as extensions of human users, explicit legal provisions would be necessary. Without such provisions, contracts autonomously formed by AI may be deemed invalid unless they are ratified by the positive consent of the parties.

Moreover, if a party does not fully understand the AI’s decision-making process, the consent of such party might not be considered fully informed. The dynamic nature of AI, with its ability to learn and adapt, poses significant challenges within the traditional Civil Law notion of consent, and current legislation does not address issues related to AI literacy or the understanding of AI’s impact on decisions, which could affect the validity of consent.

Furthermore, AI generated contracts may bring about issues regarding the identification of the contracting parties which is a sine qua non requirement for a valid contract. AI systems may obscure the identities of the contracting parties, making it difficult to ascertain their capacity to contract. This could lead to issues where contracts are formed without clear knowledge of all parties involved.

Electronic Signatures and AI Contracts

While electronic signatures are legally recognized in Malta, their application in AI contract formation remains uncertain. The eIDAS Regulation stipulates that electronic signatures should not be denied legal effect solely because they are in electronic form. However, the specific requirements for consent and the form of contracts are determined by national law.

The validity of electronic signatures is generally supported by the eIDAS Regulation, but certain contracts, such as real estate transactions, still require traditional signatures. This underscores the limitations of electronic signatures in specific sectors, despite their general acceptance.

Regarding AI contract formation, the current legal framework does not explicitly address the formation of contracts by AI, leaving a gap in legal certainty. The form and requirements for AI contracts would need to align with existing provisions for consent and capacity. Until the law evolves to address AI-specific issues, contracts formed by AI may face significant legal scrutiny and potential invalidation by local courts.

Practical Considerations and Future Directions

1. Framework Contracts: One potential avenue to mitigate some of these issues is the use of framework contracts. These are commonly used in public procurement to outline the terms for future transactions. If properly structured, framework contracts could help establish clear guidelines and consent mechanisms for AI-mediated transactions. However, this approach requires comprehensive legal recognition and adaptation to include AI specific considerations.
2. AI Literacy: Improving AI literacy among users and legal professionals is essential. Understanding how AI systems operate and their decision-making processes can help ensure that consent is informed and that parties are aware of the implications of using AI in contract formation.
3. Legislation: There is a clear need for legislative reform to address the unique challenges posed by AI in contract formation. This includes defining the legal status of AI, establishing guidelines for AI’s role in contract negotiation and execution, and ensuring that consent and capacity requirements are met in AI-mediated contracts.
4. Regulatory Guidance: Regulatory bodies could provide detailed guidance on the use of AI in contracts, including best practices for ensuring valid consent, maintaining transparency, and addressing identity verification issues. This guidance could help bridge the gap between current legal frameworks and the emerging realities of AI-driven commerce.

Av. Paul Radmilli – Associate

Mr. Andrew Drago – Trainee

Mifsud & Mifsud Advocates

For more information you can contact one of our Team Members at Mifsud & Mifsud Advocates.