AI in commercial contracts. The legal risks business owners still underestimate

Artificial intelligence is increasingly being integrated into the way businesses manage their commercial contracts. From drafting and review to document management, AI tools offer clear advantages in terms of speed, efficiency and cost.

However, in adopting these technologies, many organisations are overlooking a more critical consideration – whether the contracts being produced continue to protect the business in the way they are intended to.

While AI can generate contractual language quickly, it does not apply legal or commercial judgement. As a result, reliance on AI in this context introduces a number of risks which are not always fully appreciated.

AI processes Language, not Legal or Commercial Intent

AI tools operate by recognising and replicating patterns in existing contractual wording. Whilst this can support consistency and efficiency, it does not equate to an understanding of the purpose behind that wording.

Commercial contracts, when drafted by a lawyer, are not simply collections of standard clauses; they are carefully structured to reflect:

• the commercial objectives of the parties
• the allocation of risk
• the specific regulatory environment
• the outcome of the negotiation between counterparties

AI does not interpret these factors. In practice, this can lead to clauses that appear technically sound but fail to reflect the substance of the agreement or the interests of the business.

In particular:

• Commercial priorities may not be properly captured
  AI cannot assess what a business is ultimately seeking to achieve from the contract, such as risk allocation, long term strategic value, or commercial leverage.
• Sector-specific and regulatory nuance may be overlooked
  Generic AI tools are not reliably equipped to account for evolving regulatory expectations or industry-specific risks. They typically lack awareness of regulatory expectations, or industry specific compliance requirements. This can lead to clauses that fail to address mandatory obligations or adequately mitigate sector specific risks.
• Negotiated outcomes are not recognised
  Contracts often reflect compromise. AI cannot identify relative leverage, commercial sensitivities, or concessions agreed during negotiations, and may therefore produce language that is inappropriate, unbalanced, or commercially unrealistic.

The consequence is a contract which may be well-drafted in form, but misaligned with the commercial reality of the deal.

Compliance under UK Law cannot be assumed

A common misconception is that AI-generated contractual terms are inherently compliant or up to date. In reality, the accuracy and currency of such content cannot be assumed. AI systems do not always keep pace with:

• Legislative developments
  Changes to statutes, amended thresholds, or newly enacted obligations may not be promptly incorporated into AI training data or drafting templates.
• Regulatory guidance
  Guidance issued by regulators, which often clarifies how legislation should be interpreted and applied in practice, is frequently overlooked by AI systems despite its practical importance.
• Sector-specific compliance obligations
  Industry specific requirements, such as those applicable in financial services, healthcare, or technology, are often nuanced and evolve rapidly, making them difficult for generic AI tools to capture accurately.

This presents a material risk for businesses, particularly where enforceability is critical. For example:

• Unfair Contract Terms Act 1977
  Limitation and exclusion clauses must satisfy the statutory reasonableness test. AI-generated clauses may not adequately reflect the factors required to meet this threshold, potentially rendering them unenforceable.
• Consumer Rights Act 2015
  Where contracts involve consumers, terms must be fair, transparent and appropriately balanced. AI-generated provisions may not consistently meet these standards.
• Regulated sectors
  In industries such as financial services, healthcare or technology, contractual terms must align with current regulatory expectations. Failure to do so may result in enforcement action, financial penalties and reputational damage.

Crucially, AI tools do not flag compliance gaps with certainty. This creates a false sense of assurance, which can expose businesses to avoidable risk. This highlights the importance of treating AI as a supporting tool rather than a substitute for informed legal judgment.

Intellectual Property considerations require careful attention

The use of AI in contract drafting also raises important questions around Intellectual Property ownership and exclusivity. Key considerations include:

• Whether AI-generated clauses attract copyright protection
• The extent to which similar or identical wording may be generated for other users
• Whether a business holds exclusive rights in the contractual content it relies upon

Although copyright law may not protect purely machine‑generated works, many businesses proceed on the assumption that AI-generated content is bespoke and proprietary. That assumption may not be accurate. Without a clear understanding of ownership and licensing, businesses risk:

• Loss of exclusivity in their contractual frameworks
• Uncertainty regarding enforceability
• Potential disputes arising from shared or replicated wording

Given the importance of contractual documentation in managing risk and defining commercial relationships, these issues warrant careful consideration.

A measured approach to AI in Contract Drafting

AI can play a valuable role in improving efficiency in contract processes. However, it should be regarded as a supporting tool, rather than a replacement for legal expertise.

Effective contract drafting requires interpretation of legal obligations, understanding of commercial priorities, awareness of regulatory context and informed judgement on risk. These are not functions that AI can perform reliably.

Over-reliance on AI‑generated content without proper legal oversight risks producing contracts that are commercially misaligned, legally unenforceable, or non‑compliant with UK law. Ultimately, the value of a contract lies not in how quickly it is produced, but in the protection it provides when it is needed most.

If you would like advice on your commercial contracts, please contact Jenny Wade at jenny.wade@swinburnemaddison.co.uk.