Plattform Industrie 4.0 – a powerful think tank for digital law
When the German Federal Government initiated in 2015 its stakeholder and think tank initiative “Plattform Industrie 4.0” to discuss and address key issues to transform the German industrial landscape through digitalization, nobody was able to anticipate the pace of change caused by blockchain technology and AI. Equally, the inaugurating stakeholders, the German Federal Ministry for Economic Affairs and Climate Action, and the Federal Ministry of Education and Research, had not expected how strong and lasting the level of engagement shown by the various working groups of the Plattform Industrie 4.0 would be (see here and here).
Over the years, the “Working Group Legal Framework” (Working Group) has been particularly productive in explaining how smart manufacturing, data sovereignty and data exchange along value chains, protecting trade secrets, and other legal key issues could work and be safeguarded in accordance with the existing legal frameworks in Germany and beyond. With inhouse counsel representatives from industrial sectors and a selected number of private practitioners and academia, the Working Group represents the perspectives of a broad range of participants in the Industrie 4.0 ecosystem. In addition to issuing numerous publications and guidance notes designed to explain the core legal issues of digitalization to SMEs, the Working Group has taken an active role in various hearings and discussion rounds shaping new EU Digital legislation, namely the EU Data Act and the AI Act (see here).
Legal TestBed – smart contracts under judicial review
As one of the most remarkable projects of the Plattform Industrie 4.0, the “Legal TestBed” aims to exemplify how contract automation and fulfilment in industrial supply and logistics processes can work in a legally compliant manner, based on actual technical implementation that is open and available to any interested parties. What started as a “sand-box exercise” initiated by Prof. Dr. Georg Borges, head of the Institute of Legal Informatics at the University of Saarland (one of the leading faculties for law and informatics in Germany), together with together with the Fraunhofer Institute for Material Flow and Logistics IML, the Horst Götz Institute for Information Security at the University of Bochum, and accompanied and coached by the Working Group, has produced one of the most remarkable mock-trial precedents in the field of law and informatics.
This legal research project started in 2020 with an unprecedented approach towards technically implementing the running of automated contract negotiations with the help of software agents, using smart contracts to realize and document contract negotiations (see here). As part of the “build phase”, in 2021 the Working Group developed “Terms of Use for an Industrie 4.0 Platform”, together with a related “Guidance Note and Glossary”, which are freely available on the internet and have set the standard and base line reference document for Industrie 4.0 contracting (see here and here).
“Simulation study” – an innovative legal research tool
The final step in checking the viability and robustness of the technical implementation and contractual framework of the LegalTestBed was the “simulation study”, an innovative form of legal research and verification using mock-trials.
The mastery of Prof. Borges in designing the case and organizing the “simulation study” has been pivotal for testing the validity of legal contracts concluded via software agents. Three professional judges sitting in regular German courts were invited to lead mock-trial proceedings “at full length” under the procedural rules of the German Civil Procedural Code. Legal counsel (members of the Working Group, including the author) took the roles of representing the plaintiff and defendant in the court proceedings. Two oral hearings took place in the impressive court room of the Regional Court of Frankfurt am Main, including witness hearings and a technical expert assessment.
The court ruling was issued on 28 June 2024. The entire proceedings were documented and are available to the public, together with a video documentary (in German, in short form and long-form) produced alongside the proceedings and including interviews with the main participants. These materials are now used for teaching purposes in academia.
Facts of the case
In our mock-trial case, an industrial manufacturer of rolling bearings (Manufacturer) had subscribed to an Industrie 4.0 network and, to that end, had signed up to the “Terms of Use for an Industrie 4.0 Plattform”. The operator of the Industrie 4.0 Plattform provided a technical solution including “software agents” that the Manufacturer and any customer could activate using an account registration, in order to enter into ad hoc supply contract negotiations between participants of the Industrie 4.0 network. All the phases of the transaction (negotiating deliverables, quantities and price (within a predefined range set by the Manufacturer), concluding a contract and confirming delivery) were set up to be documented in “smart contracts” using Hyperledger Fabric technology, a particularly well suited open-source-based blockchain solution (see here). The industrial user interested in acquiring rolling bearings (Customer) had also signed up to these “Terms of Use”.
The Customer allegedly issued two separate orders for certain quantities of rolling bearings, a first tranche for 120 units, and second order for 150 units. The product specification, quantities of the order and price were negotiated in a fully automated fashion via the software agents, without any further direct human interaction or interference. When the Manufacturer delivered the first tranche and asked for payment (the payments were not made via smart contracts), the Customer said they were taken by surprise and denied ever having initiated contract negotiations; anything to the contrary must have been the result of a system failure. In respect of the second order, the Customer argued they had submitted an objection notice for defective delivery in the smart contract system. The Manufacturer argued that the Customer had submitted the objection notice too late and, hence, with no legal effect under the applicable supply terms which required any objection to be made within 24 hours of delivery.
What were the court’s findings?
The Court had to assess two questions: A. Did the Customer conclude a valid purchase contract for the 120 units? B. Did the Customer submit a timely objection notice for allegedly defective products? As German procedural rules do not provide for discovery or disclosure obligations, the defendant’s counsel had a comfortable start on the first claim (A.) by denying that the plaintiff had substantiated its claim. The plaintiff argued that a contract was concluded prima facie by using the technical facilities of the Industrie 4.0 Platform. In fact, the Court insisted that the plaintiff provide further clarity and substantial evidence before even considering the appointment of a technical expert to verify the alleged facts. In the second oral hearing the Court had the pleasure of inspecting on screen an image of several thousand lines of code from the blockchain entries, after the plaintiff had argued that this clearly manifested the Manufacturer’s offer and the Customer’s statement of acceptance… at which point the Court appointed a technical expert to examine the evidence. On B. the defendant had difficulties establishing that its objection notice was submitted in time, arguing the technical unavailability of the Manufacturer’s node as the reason for not being able to deliver the objection notice in time. Again, the Court opened the path for a technical expert assessment.
At the end of the proceedings, the Court confirmed both claims in favor of the plaintiff, following the technical expert’s assessment, which ran to 67 pages (!).
Why is this case so important?
As Prof. Borges put it on the day of the Court ruling: “Today is a day of success for the blockchain. We have been able to prove that parties can validly conclude contracts that have been automatically negotiated via software agents”. Indeed, the court ruling has set a widely recognized precedent giving profound reasons – albeit not formally binding “in the outside world”, but that does provide a strong legal argument and reference in favor of automated contract negotiations. Notably, it goes far beyond common academic references and theories set out by legal writers. The facts were established through real-life implementation, examined by fully qualified judges and a professional technical expert.
Going forward, the challenge of arguing these cases could be alleviated, quoting one of the party representatives: “Presenting and arguing the case in this prominent court room before three excellent professional judges under the existing rules of procedure felt no different than being the party representative in ordinary proceedings – with one difference: It was much harder to establish the facts and legal arguments that haven’t been tested in court in any similar settings before.”
In conclusion, software agents will play an important role in future contract negotiations. The Legal TestBed has made a significant contribution to efficiency in industrial digitalization and AI.
Author
Dr. Alexander Duisberg
Ashurst, Munich
Partner