Lawyers Still Matter: The Pitfalls of Asking AI to Draft a Contract

“AI is going to reshape every industry and every job,” said Reid Hoffman, Co-founder of LinkedIn.¹ In many ways, it already has. Whether we’re streaming personalized music recommendations² or simply typing questions into Google³, Most of us have already woven artificial intelligence into the fabric of our daily lives.

The business world has thrown itself into the age of AI, with many companies now using technology on a routine basis. As a result, entrepreneurs across the country have begun to rely on AI to draft legal agreements. ⁴ Small-business owners are inclined to use ChatGPT or similar programs to avoid the time and expense associated with hiring a lawyer to draft a contract. While AI can certainly make businesses operate more efficiently, it is by no means “a magic solution.”⁵

This article explores the pitfalls of using AI to draft legal agreements and explains why lawyers remain essential to protecting businesses’ interests.

Can AI Draft a Legally Enforceable Contract?

Under Utah law, a contract typically requires just three elements to be binding and enforceable:

1. An offer;
2. An acceptance; and
3. Consideration.⁶

“Whether drafted by a human or generated by AI, a contract must include these components to be recognized and upheld by the law.”⁷ A contract drafted by AI can meet these requirements and still be legally valid. The issue is not enforceability; it is quality, completeness, and legal precision.

AI-generated contracts often fail to fully protect business interests due to missing terms, vague language, or jurisdictional oversights.

Common Risks of AI-Generated Contracts

Ambiguous or Incomplete Contract Terms

So, could a business draft a contract using AI? Certainly. Such a contract could even be legally enforceable. The problem, however, lies with what AI-generated contracts may include—or, just as importantly, what they may overlook.

In one real-world scenario, a business owner made the mistake of getting involved with the wrong people. Specifically, his manufacturer had begun using confidential information without providing him any form of compensation. Upon further review, it became clear that the manufacturer’s conduct likely violated a non-disclosure agreement (NDA) executed by the parties at the outset of their business relationship. But, as you may have guessed, the issue was complicated by one key fact: the NDA had been generated by AI.

Having been prepared without the oversight of a legal professional, the NDA contained numerous issues. Chief among these issues was the fact that many of its terms were ambiguous. Fortunately for the business owner, however, it was the manufacturer who had used AI to generate the NDA. In Utah (as in most jurisdictions) contractual ambiguities are resolved in favor of the non-drafting party—i.e., the person who didn’t write (or, in this case, used AI to generate) the document.⁸ The business owner was lucky—he hadn’t prepared the problematic agreement he was now seeking to enforce and, as such, wasn’t forced to bear the brunt of the NDA’s many flaws. The same cannot be said for the manufacturer.

Missing Critical Legal Clauses

AI-generated contracts can omit essential provisions entirely. For Example, business owner Petr used AI to create a contract, one that “looked fine” on its surface. But when a dispute arose with the other party, and Petr took him to court, the contract was ultimately found invalid “due to a missing signing clause.” Simply put: “Petr paid the damages – AI bore no responsibility.”⁹

These types of omissions are not uncommon and can render an otherwise functional agreement ineffective.

AI “Hallucinations” in Legal Content

Another common problem associated with using artificial intelligence in place of an attorney involves “hallucinations”—that is, citations to non-existent legal authority.

A Thomson Reuters Westlaw study identified at least “22 different cases in which courts or opposing parties found non-existent cases within filings, leading to discipline motions or sanctions in many instances.”¹⁰ While hallucinations are most frequently discussed in the context of litigation, the problem has begun to seep into contract-drafting as well.

In the article AI Can Draft Contracts—But Can You Trust Them?, Rachelle Soderstrom and Rochelle Mulondo discuss an AI-generated commercial contract that included the following:

“Any dispute, controversy, or claim arising out of or relating to this Agreement, or the breach, termination, or invalidity thereof, shall be finally settled by arbitration in São Paulo, Brazil, in accordance with the rules of the American Chamber of Commerce, Canadian Chamber of Commerce, or other mutually agreed renowned Chamber of Arbitrations.”¹¹

On the surface, this passage might seem believable. However, as Soderstrom and Mulondo point out, “there are no such rules of the ‘American Chamber of Commerce’ or the ‘Canadian Chamber of Commerce.’”¹² This is a classic hallucination—one of the many problems people risk encountering when they use AI in place of an attorney.

When AI Can Be Useful in Contract Drafting

Despite the pitfalls identified above, artificial intelligence—when used properly—can help businesses and business owners alike. The most important thing to remember is that AI is a tool. Like other digital tools, it “require[s] oversight and confirmation and should not be used to replace professional judgment.”¹³

When used as a tool, AI can help small-business owners reduce the costs associated with routine legal work. Morvareed Salehpour, “an attorney specializing in technology and commercial contracts with over fifteen years of experience representing startups and established businesses,” encourages small-business owners to pair AI’s efficiency with human expertise.¹⁴ She recommends that business owners use AI to generate an initial draft and then hire an attorney to ensure the contract is complete, coherent, and legally sound. “For many businesses, this hybrid approach offers the best of both worlds: faster contract creation, lower costs, and peace of mind that the legal essentials are covered.”¹⁵

The Best Approach: Combining AI Efficiency with Legal Expertise

Business owners need to exercise caution when it comes to their contracts. Though few expect it to happen to them, problems can—and frequently do—arise long after the parties have signed the dotted line. When this happens, your ability to protect your business’s interests will largely depend on how well the contract was prepared.

As the foregoing discussion makes clear, business owners would be wise not to rely solely on artificial intelligence when preparing their agreements. After all, AI is “not designed to provide legal advice.”¹⁶ Yet, as Morvareed Salehpour notes, business owners who pair AI with an experienced attorney can avail themselves of the best of both worlds.

To learn more about how experienced attorneys can assist in your particular situation, please request a consultation with Christensen & Jensen.