The legal risks of using AI to draft a contract

As a result of these benefits, many business owners are now utilising AI to draft contracts, terms and conditions, supplier agreements, and other legal documents.

However, whilst AI can produce a document that looks convincing, it may fail to allocate risk, protect commercial interests, or help prevent disputes. If AI gets these details wrong, the consequences can be costly for a business.

In our article below, created in collaboration with Markel Law, we explore the risks of using AI to draft contracts and explain why human legal oversight remains essential. The appropriate level of review will depend on the complexity, value and risk associated with the agreement.

AI is no substitute for regulated legal advice and expertise

One of the biggest risks of using AI to draft contracts is assuming that it can provide trustworthy and accurate legal advice. Generative AI tools are typically designed to predict and generate language – they are not programmed to understand your specific legal obligations, industry, appetite for risk, or the commercial objectives behind an agreement. Whilst they may produce professional-sounding clauses, AI cannot exercise legal judgement in the way a qualified solicitor is trained to.

Legal professionals are able to identify risks, negotiate protections, anticipate potential disputes, and tailor agreements to specific circumstances, whereas AI does not have the ability to assess whether a contract reflects your overall business strategy or whether a clause could expose your organisation to unnecessary liability.

This distinction is particularly important when negotiating commercial agreements, where legal and commercial considerations are often closely intertwined. Whilst the Law Society highlights the opportunities which generative AI presents, it also emphasises the need for appropriate human oversight.

If you are unsure whether a contract adequately protects your business, seeking professional legal advice before signing an agreement can help to identify any risks that AI may miss.

Outdated information and legal inaccuracies

AI systems are only as reliable as the information they are trained on. Depending on the platform being used, the output may be based on outdated legislation, superseded case law, or generic legal principles that do not accurately reflect current legal requirements. AI can also present inaccurate information confidently, making errors difficult to spot.

This can create a range of risks when drafting contracts, such as an unenforceable limitation of liability clause, poorly drafted termination provisions, or omission of key contractual protections that could have significant financial consequences if a dispute arises.

Generic drafting

One of the most common risks posed by AI-generated contracts is that they may read like a contract, but not necessarily your contract. Different industries and business models require different contractual protections – a clause that works in one contract may be entirely unsuitable in another. For example, a tradesperson may need robust payment and variation clauses, while a technology business may prioritise intellectual property ownership and data processing provisions. Contracts that fail to reflect these nuances may leave businesses exposed when disagreements arise.

The result is a document that sounds professional, but may not reflect the realities of the transaction, leaving key risks insufficiently addressed or improperly allocated between the parties. This is why many SMEs benefit from reviewing contractual risks as part of a wider approach to business risk management and legal compliance, rather than relying solely on template agreements generated by AI.

Failure to understand commercial context

AI can produce standard-form language but often fails to incorporate the specific commercial context in which an agreement will operate as it cannot identify strategic priorities, understand relationship dynamics, or recognise industry-specific concerns in the same way an experienced solicitor can.

AI-generated contracts may also contain inadequate or entirely missing liability caps, poorly constructed indemnities, or risk allocation provisions that can leave one party materially exposed to risks it did not intend to accept. Obtaining professional legal advice before entering significant contractual commitments can help ensure an agreement aligns with both your legal obligations and wider business objectives.

Ambiguous wording

Contracts are designed to create certainty; however, AI can introduce vague language, inconsistencies, and drafting gaps that create uncertainty instead. When contractual obligations are unclear, disagreements can arise over payment terms, service levels, responsibilities, or termination rights.

The risk is often not that the contract is incorrect, but that the document may appear comprehensive until a disagreement exposes weaknesses in the drafting. Seeking legal review before signing important agreements can help prevent costly disputes and reduce the likelihood of misunderstandings later on.

Confidentiality and data protection risks

Contracts typically contain commercially sensitive information, customer details, intellectual property, and financial arrangements, however, entering confidential information into an external AI tool may expose businesses to data protection and confidentiality risks, particularly where organisations have not fully assessed how the AI provider stores, retains or uses submitted information.

The Information Commissioner's Office (ICO) has issued guidance on the use of AI and organisations' obligations under UK data protection laws, stating that businesses should understand how any AI platform collects, stores, and processes data before submitting sensitive information.

For organisations handling personal data, contractual confidentiality obligations should also be considered alongside wider cyber and information security risks. Businesses concerned about data-related exposures may wish to review their overall approach to cyber risk management and data protection governance.

Lack of accountability

If a solicitor provides negligent legal advice, there are clear professional and regulatory frameworks governing accountability, however, the position becomes less straightforward when businesses rely heavily on AI-generated content. Questions may arise over who was responsible for checking the output, identifying inaccuracies, and ensuring regulatory compliance.

As AI adoption increases, organisations should ensure there are clear governance processes surrounding the use of AI in legal and commercial decision-making. This includes maintaining appropriate human oversight and documenting how important contractual decisions are reached.

Regulatory blind spots

Although AI tools can draw on vast amounts of information, they do not reliably account for sector-specific regulatory requirements. Even where explicitly prompted, the output may not fully address sector-specific regulatory requirements or identify important omissions. This is precisely where legal due diligence matters; without it, the contract may appear compliant on its face, but could omit significant regulatory obligations, overlook mandatory protections, or include provisions that are unlikely to be enforceable.

In the UK, AI is currently regulated through existing legal and regulatory frameworks rather than a single standalone AI law, so businesses should consider how existing obligations around contracts, data protection, confidentiality, and professional advice apply when using AI tools.

Overreliance on AI

Ultimately, the greatest risk of using AI to draft contracts is not the technology itself but overreliance on it. As AI-generated documents often appear polished and authoritative, users can develop a false sense of confidence that a contract is accurate, complete, and legally enforceable. In reality, even minor drafting issues can lead to significant commercial and legal consequences.

AI can be an effective tool for creating first drafts and improving efficiency. However, contracts remain legal documents that allocate risk and create obligations. Before relying on any AI-generated contract, businesses should ensure it has been reviewed by someone with the appropriate expertise.

Mitigating the risks of using AI to draft contracts

• Use AI for first drafts, not legal advice: You can use AI as a tool, not a substitute.
• Ensure all AI-generated contracts are reviewed by a professional: Human oversight is essential, as AI can support professional decision-making, but legal advice and professional judgement remain important where contractual risks are material.
• Avoid entering confidential information into public AI tools: Proceed with caution.
• Develop an internal AI usage policy: Set clear guidelines for your team.
• Regularly review contracts and legal processes: Always keep practices up to date.

Discover more help and guidance for professionals and read about how cyber insurance can help safeguard your business.

Please note: This article provides guidance for information purposes only and is accurate at the time of production. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referred to are limited to those of the websites, and do not necessarily reflect the views of Markel Direct. Markel Direct is not affiliated with any of the brands, companies or websites mentioned in this article.