Can You Use AI to Draft a Business Contract? Legal Risks and Best Practices

Artificial intelligence can help with many tasks, including contract drafting, which can save time and money. There is generally no law prohibiting you from using AI to draft a contract. However, it may not always be the best option.

Relying on AI alone, without legal professionals, can create serious legal risks. Don’t risk your business success. Read on to see when AI can help draft a business contract and when it’s best to get a legal review.

Use the Super Lawyers Directory to find an experienced contracts attorney in your area today.

Can AI Draft a Business Contract?

Yes. Large language models (LLMs), a subset of generative AI, can draft contracts by generating text in response to user prompts.

That said, AI contract drafting and review have already revolutionized various aspects of contract management and have become increasingly adopted in contract workflows.

AI offers numerous benefits, including:

• Increased efficiency
• Instantaneous contract analytics
• Improved accuracy
• Enhanced risk assessment and mitigation

AI helps attorneys create the first draft of a legal document, but legal experts agree that AI should not be used alone to draft a legal contract. AI lacks awareness of contextual implications and contract-specific considerations, so it is not reliable on its own. AI simply lacks the legal judgment of a human.

How Businesses Are Using AI in Contract Drafting Today

In practice today, attorneys use AI to generate a template rather than as a full-service document-production tool. Attorneys find AI helpful for contract review and for finding inconsistencies, ambiguities, or errors. AI can also be especially helpful in determining the best language to include in a contract, as it pulls from clause libraries.

For business owners who are looking to draft and execute a DIY contract, there may be reasonable use cases. For example, low-risk, standardized agreements or early internal drafts may be a good fit for AI-assisted drafting of a business contract.

Or, basic templates for simple non-disclosure agreements (NDAs) or routine vendor agreements. Clause libraries and approved templates can be a safe starting point for a solid business agreement. As with all AI processes, it’s important to keep human oversight in the loop.

What a Business Contract Must Generally Include

If you have limited experience drafting or reviewing contracts, you should view an AI-drafted contract as a starting point for a legal document.

Protecting your business interests means you should proceed cautiously when using AI to draft a business contract without obtaining legal review. That said, a business contract must generally include the following basic contractual elements and terms:

• Identification of the parties
• Clear offer and acceptance
• Consideration and exchange of value
• A lawful purpose
• Definite and clear terms
• Scope of work, deliverables, timeline, and payment terms
• Term and termination rights
• Confidentiality obligations and NDAs (where relevant)
• Dispute resolution, governing law, and venue
• Risk allocation provisions, including limitation of liability and an indemnity clause
• Where required, signatures, and any other execution formalities, such as witness, notarization, or specific signing authority requirements

With any contract, the requirements of contract law can vary by contract type and jurisdiction.

The Biggest Legal Risks of Using AI To Draft a Business Contract

Yes, AI can produce a document that can become legally enforceable. However, relying on it alone can be risky.

You have probably heard AI horror stories involving hallucinations wreaking havoc, from creating fake citations in legal briefs to misstating key contract terms that can trigger expensive disputes or unenforceable obligations.

It could miss important risk allocations essential to the contract negotiation process, fail to protect rights central to the contract, and create potential disputes.

It’s particularly important to involve a contract lawyer when you are working on a high-value deal or have had a complex contract negotiation. Contracts with heavily negotiated indemnity clauses or major liability exposure are also critical to have reviewed.

Getting legal counsel involved is prudent in any situation where it’s cheaper than resolving a dispute later, which is the case in the vast majority of contracts.

Privacy and Security Risks When Using AI for Legal Documents

Privacy concerns arise when using public AI tools for contract drafting that contain confidential or regulated information. Access controls can help mitigate data security risk.

Where applicable, to effectively incorporate AI tools into the contract lifecycle management process, your use of those tools, and any resulting data processing, must comply with the General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and similar privacy obligations. Systems that fall under these laws must comply.

Best Practices When Using AI for Contract Drafting

AI can significantly improve the contract management process, benefiting the bottom line through increased efficiency and productivity. Implementing AI in the contract creation process requires following best practices to avoid common pitfalls.

For those who are not legal professionals with experience drafting and reviewing contracts, using AI can be a great starting point. It may also make your time with a legal professional more productive.

Keep the following in mind:

• Use AI for brainstorming but not for final approval without legal review
• Begin drafting with trusted templates, clause libraries, or approved forms
• Track changes and compare redlines carefully
• Keep confidential details out of publicly available tools like ChatGPT
• Treat AI as part of risk management

Adhering to best practices is necessary to make the most of AI when drafting business contracts, and you should not view AI as a replacement for lawyers.

Why Human Oversight Still Matters

If contract attorneys with deep legal expertise in drafting and reviewing contracts view it as a supplement rather than a replacement for human judgment and review, you probably shouldn’t either. Human oversight remains necessary to ensure the generated legal document is appropriate for the specific use.

Verifying outputs instead of assuming AI is correct is a key component of responsible AI use that only humans can perform. Plus, legal judgment is required to identify hidden exposure and enforceability.

Consult a Contracts Attorney

AI can make drafting a contract more efficient, but you will still need a legal professional to review the final contract to ensure it’s correct and meets your business’s specific needs. Relying on AI alone to draft a contract can lead to costly mistakes that an attorney can help avoid.

Consulting a contract lawyer can help you with the drafting process or review a contract you drafted using AI to ensure it adequately addresses any unique clauses and situations that the AI might not comprehend.

Visit the Super Lawyers directory and use the search to find a lawyer who practices contract law in your area.