Using AI to Draft Business Contracts: What Business Owners Need to Know

Written contracts are the backbone of business relationships. Using an artificial intelligence (AI) tool to generate business contracts may seem like a good way to save money and time, but it may cost a business owner more than they save from not hiring a lawyer.  A single overlooked clause could create costly legal battles, compliance issues, or operational headaches.

Using AI to Draft Contracts

Artificial intelligence is rapidly changing the way business owners approach contracts.  AI can generate contract templates, suggest clauses, and propose language for common business agreements. This is a positive development for small business owners.  Too often they rely on verbal agreements. Having any written agreement is almost always better than a handshake agreement.  AI can save time and money and provide a starting point for a proper contract, but it comes with significant risks. Relying on AI to draft your contract involves many risks, including the following:

• Terms and conditions that are unclear, contradictory, or vague

  
  

• Terms and conditions that should be included but are excluded because AI does not understand the law or regulatory environment, industry, transaction, business involved, or other contextual nuances of the business matter

  
  

• Contracts that are unenforceable because they do not meet all the necessary legal requirements of contract law in general or the law of the relevant jurisdiction

  
  

• Cookie-cutter terms that are not applicable to the specific needs and goals of the business

  
  

• Inclusion of illegal bias or discriminatory language

  
  

• Exposure to liability and litigation resulting from the AI tool’s failure to include contractual provisions that adequately protect the business

  
  

• Data security concerns arising from failure to comply with data protection regulations.

See “AI Hacks: What Works, What Doesn’t, and How to Stay Ahead” for more on privacy concerns with AI.

For another perspective on how AI is reshaping compliance and oversight, see “The Accounting Implications of Artificial Intelligence in Audits”.

Real World Example

A small business owner used AI to draft a supplier agreement. AI suggested a penalty clause for late deliveries, but it conflicted with local commercial law. Without attorney review, the business could have faced unenforceable terms and disputes that delayed shipments and damaged relationships.

Instead of using AI to draft an entire contract, it is better suited for tasks like brainstorming key points, summarizing obligations, or creating a rough outline of the agreement. AI can help turn scattered notes into a more cohesive draft and highlight areas you may want to focus on. But the final contract should always be drafted and reviewed by a qualified attorney to ensure enforceability.

Using AI to Review Contracts

AI is a great tool for reviewing contracts to summarize and explain key provisions. Too often, small business owners do not understand certain provisions and legal jargon such as subordination, indemnification, confession of judgment, and force majeure. These concepts can be broken down by AI to help the owner understand their meaning within the context of the contract. In addition, the technology can flag potential issues, such as inconsistent clauses, spelling and grammatical errors, or missing standard provisions. It may even suggest ways to improve clarity or standardize language across multiple documents, which can save time and reduce basic errors.

Despite these advantages, AI is not infallible. Different software platforms vary widely in accuracy, and even the most advanced systems may miss critical legal nuances. AI cannot interpret context, weigh strategic considerations, or account for jurisdiction-specific laws in the way a human attorney can. It may also miss financial nuances like late fees, payment schedules, or tax responsibilities, leaving businesses exposed to legal and financial risk.

Real World Example

During contract review, AI flagged inconsistent language about payment terms but failed to recognize that the schedule violated state tax reporting rules. Without human oversight, this could have triggered legal and financial penalties.

Learning to Use AI Wisely

AI can be a powerful support tool, but effective use requires understanding its strengths and limitations. Business owners should learn when and how to use AI responsibly, recognizing tasks it can assist with (like organizing points for discussion or highlighting potential inconsistencies) and tasks that always require human expertise (like legal interpretation, negotiation, and final review.) AI is a tool to support humans, not replace them. Misusing AI can create errors, misunderstandings, or unintended liabilities.

Best Practices for Business Owners:

• Treat AI as a tool, not a replacement for professional expertise.

  
  

• Always have contracts reviewed by a qualified attorney before signing.

  
  

• Understand that contract laws vary by state, jurisdiction, and industry, and AI is unlikely to account for all these nuances.

  
  

• Consider using a specialized AI tool that is intended for your particular type of business matter.  These types of tools are not free, but they are much less expensive than an attorney.  Using one of these tools can be a good first step in a process that includes an experienced business attorney. It may reduce the overall legal cost of getting a contract that fits your needs. 

  
  

• Research the quality, training, and reliability of any AI software before using it.

  
  

• Keep clear records of AI-generated suggestions and human-reviewed edits for accountability.

Moving Forward

AI is reshaping how businesses approach contracts. By thoughtfully combining AI with professional legal review, business owners can streamline contract processes while minimizing risk and ensuring that agreements are enforceable, accurate, and protective of their business interests.

For guidance on contracts and best practices for incorporating AI into your workflow safely, contact Fiffik Law Group to ensure your agreements are both efficient and legally sound. For advice on the financial and tax implications of your contracts, including payment structures and reporting responsibilities, business owners may also benefit from consulting a trusted accounting partner like Donnelly-Boland and Associates.