Artificial intelligence is transforming how many organisations work. Tasks that once required hours of effort can now be completed in seconds, and contract drafting is one of the areas where this shift is most visible. With the growth of AI tools, businesses can now produce a full agreement almost instantly by entering a short prompt. For small and growing businesses without a dedicated legal team, that kind of immediate access feels like a genuine solution to a real problem.
However, while AI tools can generate words on a page, a contract is more than a collection of sentences. A contract is a legal safeguard. It is the document that outlines expectations, assigns risk and sets out what happens when things do not go as planned. This is where the difference between AI generated text and legally sound drafting becomes significant. AI can create content, but it cannot replace the judgement, context or careful thinking that an experienced legal professional brings.
In this blog, we explore why AI generated contracts are becoming more common, the risks that come with them, and how organisations can use these tools responsibly without exposing themselves to avoidable legal problems.
Why More Businesses Are Using AI for Contracts
For small businesses without a dedicated legal function, AI contract tools offer three practical advantages:
- They produce a first draft in moments rather than days, removing the blank-page problem.
- They reduce upfront costs by giving you something concrete to bring to a lawyer for review.
They make formal contracts more accessible to businesses that might previously have left agreements informal simply because engaging a solicitor felt daunting or expensive.
The Risks of Relying on AI Generated Contracts
Although AI can be a useful tool, it comes with limitations that are important to understand. AI does not know your business, your priorities, or the people you work with. Because of this, AI generated contracts can create gaps, inconsistencies or risks that are not immediately obvious.
AI does not understand your business context
An effective contract reflects your commercial reality. It should take into account your goals, the nature of the working relationship and the risks involved. AI tools create wording based on patterns from training data. They cannot assess how your business operates or what matters most in your specific situation.
A lawyer, on the other hand, will ask questions such as:
- What is the biggest risk in this agreement
• Who is responsible if something goes wrong
• What outcomes matter most to your organisation
• How could this contract lead to a dispute
Those questions shape the contract in ways AI cannot replicate.
AI cannot properly assess legal risk
A contract is not just a document. It is a tool that allocates legal and financial responsibility. A legal professional evaluates issues such as liability, intellectual property ownership, data protection obligations and regulatory requirements. AI can generate clauses that look convincing, but it cannot judge whether those clauses are enforceable or whether they protect you in a real legal dispute.
A document that looks polished on the surface can still expose your organisation to significant risk.
Jurisdiction matters more than people realise
Laws differ widely between countries and sometimes even between regions. A clause that is effective in one jurisdiction may not be enforceable in another. AI tools do not consistently account for these differences. This means the contract may contain clauses that are invalid, misleading or unenforceable where your business is based.
Without proper review, this can create significant vulnerabilities.
AI cannot support negotiation
Most contracts evolve through negotiation. This is where commercial strategy, risk management and human understanding play crucial roles. AI cannot anticipate how the other party might respond or advise you on which terms are worth protecting. It cannot adapt your strategy or support you through complex discussions.
Human judgement remains essential here.
AI does not provide accountability
This is one of the most overlooked issues. Lawyers operate under professional standards and regulatory frameworks. They carry responsibility for the advice they provide. AI tools do not. If a clause fails, if the agreement leads to a dispute or if something important is missing, the tool is not accountable. This leaves your organisation without protection.
The courts are beginning to confirm this. In Walters v. OpenAI (Georgia, May 2025), the first known defamation case brought against an AI developer in the US, the court found that OpenAI bore no liability for false output generated by ChatGPT. The AI itself has no legal personhood and cannot be sued. The case also established that prominent disclaimers shift responsibility toward the user. In other words, when something goes wrong, the law is increasingly clear that the tool will not be held to account. The person or business that relied on it will be. Whilst the case is not binding in the UK, it provides a clear marker of how courts are beginning to approach AI accountability more broadly.
For contract drafting, the implication is straightforward. If an AI-generated clause turns out to be unenforceable, incomplete or wrong, there is no professional indemnity to call on and no regulatory body to complain to. The risk sits entirely with you.
Best Practices When Using AI for Contract Creation
The most effective approach is a blended one. Use AI to produce a starting draft as it is good at generating structure, suggesting standard clauses and saving time. Then bring in a legal professional to review what the tool has produced, identify gaps, check enforceability and tailor the document to your specific situation and jurisdiction. Any agreement that carries real financial or reputational risk should not go unsigned without that human check. AI can produce text. It cannot be held accountable if something goes wrong.
A Real World Example
Imagine a business using an AI tool to generate a service contract. At first glance, the contract might appear comprehensive. However, with professional review, issues may be identified such as unclear liability terms, incomplete data protection provisions or missing intellectual property safeguards.
With the right support, the business can:
- document which elements were reviewed or amended
• adjust risk allocation according to its needs
• clarify responsibilities between both parties
• ensure the agreement aligns with local legal requirements
• strengthen dispute resolution and termination clauses.
This creates a stronger, clearer, and more protective agreement. Perhaps more importantly, a legal adviser can articulate and negotiate these points with the other party, understanding what matters most commercially to your business and ensuring the outcome reflects that.
Why This Matters Now
As AI becomes more integrated into everyday operations, it is natural for businesses to explore how it can support their legal processes. However, the growing use of AI generated contracts has also attracted the attention of regulators who expect organisations to use these tools responsibly. Understanding the limits of AI now will help your business avoid problems later.
Strong governance, careful review and clear oversight help you use AI safely while still benefitting from the efficiency it brings.
Final Thoughts
AI can support faster and more accessible contract drafting. It can help businesses work more efficiently and reduce initial costs. However, it cannot replace human judgement, commercial understanding or legal expertise. Contracts remain one of the most important tools for protecting your organisation. They need to reflect your context, anticipate risk and comply with the legal framework you operate in.
The most effective approach is a blended one. Use AI to help with drafting, but rely on legal professionals to refine, review and strengthen your agreements. This combination will help you innovate safely and confidently.
If you would like guidance reviewing AI generated contracts or want support ensuring your agreements protect your organisation, we would be happy to help. You can reach the Thrive team at enquiries@thrivelaw.co.uk.
