As artificial intelligence (AI) continues to reshape the commercial landscape, many businesses are increasingly turning to AI-generated contracts and automated drafting tools to streamline operations and reduce costs. While the promise of speed, efficiency, and convenience is attractive, using AI to generate contracts and legal agreements carries significant legal and commercial risks. Without proper legal oversight, AI-generated contracts can expose businesses to unclear terms, enforceability issues, and unintended liabilities that may only surface when a dispute arises.
AI-powered platforms like ChatGPT can now generate contract templates, draft clauses, and suggest negotiation workflows. For startups and SMEs, these tools offer a low-cost alternative to traditional legal services. But convenience can come at a cost.
Key legal risks of AI-generated contracts
Lack of contextual judgment
In particular, AI lacks the human judgment needed to assess commercial context, risk appetite, or strategic objectives. A clause that appears legally sound might be commercially unwise or misaligned with your business goals. AI cannot yet evaluate the broader implications or practical effects of indemnities, limitation of liability, or termination rights on your specific business.
For example, a technology company uses AI to draft a software licensing agreement with a major client. The AI-generated contract includes a broad indemnity clause requiring the company to indemnify the client for any third-party claims related to the software. Legally, the clause looks sound and enforceable. However, from a commercial perspective, this is problematic:
- The company operates in a sector where intellectual property disputes are common. Accepting unlimited indemnity exposes the business to potentially huge financial risk.
- The company’s risk appetite and insurance coverage only allow for capped indemnities, which the AI did not consider.
- The client is a strategic partner, and the company’s objective was to maintain a balanced risk allocation to foster a long-term relationship. The AI’s clause undermines this goal by shifting disproportionate risk to the company.
Result: The clause, while legally valid, is commercially unwise and misaligned with the company’s strategic objectives. A human solicitor would have negotiated a cap on indemnity or limited it to specific breaches, aligning with the company’s risk management framework.
Inaccuracy and non-compliance
AI tools are only as good as the data they’re trained on. If the training data is outdated, inaccurate or incomplete, based on the wrong jurisdiction, or lacks nuance, the resulting contract may omit critical clauses or misinterpret legal obligations. For example, an AI-generated agreement might fail to include mandatory data processing clauses under UK GDPR if it doesn’t recognise or know that your business is a data processor. We explore additional risks and pitfalls associated with the training of AI in our article ‘Training AI systems: Is it stealing or just learning by example?’.
Over-reliance and false confidence
There’s a growing risk that businesses may place undue trust in AI-generated documents without carrying out a legal review or general sense check. This can lead to a false sense of security, especially when the contract appears polished and professional. However, surface-level quality does not guarantee legal robustness. For example, the AI may draft a heavily one-sided supply of services contract that excludes all liability of the supplier, and the customer might sign this without complaint. However, a court is likely to consider such an exclusion unreasonable under the Unfair Contract Terms Act 1977 and declare the clause invalid. This would ultimately result in the supplier’s liability being unlimited and putting the supplier at risk of paying out a lot of money if it loses a claim to the customer.
How to use AI sensibly in contract drafting
- Always involve a qualified solicitor to review AI-generated contracts before execution: A solicitor can check that the contract is legally enforceable under UK law, tailored to your specific transaction or industry and aligned with your commercial objectives.
- Use AI as a drafting assistant, not a replacement for legal advice: Think of AI as a first-draft generator or a clause suggestion engine, not a legal decision-maker. It can help speed up routine tasks like suggesting boilerplate clauses, reformatting or summarising long contracts. However, AI should not be relied on for negotiating terms, interpreting legal obligations or advising on regulatory compliance. A solicitor can ensure the clause reflects current risks and legal standards.
- Ensure your AI tools are compliant with UK data protection and confidentiality standards: When using AI platforms, especially cloud-based ones, businesses must ensure client and contract data is not exposed to third parties. You should check the AI provider’s terms and conditions to ensure the provider complies with UK GDPR, and confidential information is not retained or reused by their model.
Final thoughts on AI-generated contracts
AI is a powerful tool, but it’s not a lawyer. While it can support legal teams and improve efficiency, it cannot replace the nuanced judgment, ethical reasoning, and contextual understanding that human solicitors provide. Businesses that embrace AI responsibly, with legal oversight, will be best positioned to benefit from innovation without exposing themselves to unnecessary risk.
How Moore Barlow can help
Our Commercial and Technology lawyers advise businesses across a full spectrum of commercial contracts that underpin supply chains, service provision and partnerships. From drafting supply of goods and services agreements to tailored terms and conditions, manufacturing contracts and distribution deals, we ensure your agreements are clear, commercially robust and legally enforceable.
