Can AI-Generated Contracts Increase the Risk of Disputes?

From drafting emails to analysing data and generating reports, AI tools are helping organisations save time and reduce costs. Contract drafting is no exception and businesses of all sizes are increasingly using AI-powered platforms to review clauses and produce legal documents within minutes.

While these tools offer significant efficiencies for businesses, they also raise an important question: Can AI-generated contracts increase the risk of disputes?

The answer is not straightforward. AI can be a valuable drafting aid, but relying on it without proper legal oversight can create uncertainty, ambiguity, and unintended consequences that could ultimately lead to costly disputes.

The Appeal of AI-Generated Contracts

For many businesses, AI-generated contracts are attractive because they are quick, accessible, and often inexpensive compared to traditional legal drafting. For smaller businesses without an in-house legal team, the access to such platforms may seem revolutionary.

A business could generate a service agreement, consultancy contract, or non-disclosure agreement in a matter of minutes using an AI platform. In addition to this, AI tools can also suggest alternative wording, identify potential issues, and tailor provisions based on user inputs.

For straightforward and low-risk transactions, these tools may provide a useful starting point. However, contracts are not simply a collection of legal clauses. They are commercial documents designed to set out and define responsibilities of the parties and to anticipate future problems which could arise. This is where AI-generated contracts can present challenges.

The Risk of Ambiguous Drafting

One of the most common causes of contractual disputes is ambiguity.

AI systems generate content based on patterns in existing data rather than a genuine understanding of the parties’ commercial objectives. AI does not know your business and as a result, a contract may contain provisions that appear legally sound but do not accurately reflect what the parties intended to achieve.

For example, a payment clause may fail to address a specific arrangement, or a termination provision may not adequately define the circumstances in which a party can bring the agreement to an end.

Lawyers will ask the questions which AI cannot and fill the irregularities and risks that are not immediately obvious within an AI generated contract.

So when disagreements arise, the parties may discover that the contract does not provide a clear answer. This uncertainty can quickly lead to disputes over interpretation and enforcement.

The One-Size-Fits-All Problem

Many AI-generated contracts are based on generic templates.

Although AI tools can customise documents to some extent, they may not fully account for industry-specific risks, regulatory requirements, or unusual commercial arrangements.

For example, a software development agreement raises different issues from a construction contract or a distribution agreement. It is important to remember that Intellectual property rights, liability of the parties, confidentiality obligations, and performance standards often require careful consideration and bespoke drafting; something AI cannot do.

It is clear that when important risks between parties are overlooked, the likelihood of a future dispute increases significantly.

Inconsistent Contract Terms

Another challenge is consistency.

Businesses often use AI tools to generate contracts independently across different departments within the business. Without proper oversight by a lawyer, organisations may inadvertently create multiple versions of similar agreements containing inconsistent obligations, liability caps, dispute resolution mechanisms, or termination rights.

These inconsistencies can create confusion when disputes arise and may weaken a business’s ability to enforce its contractual rights.

A coherent contract management strategy remains essential, regardless of how contracts are drafted.  Again, a lawyer’s input would ensure that consistency is maintained across the departments.

The Danger of False Confidence

Perhaps the greatest risk associated with AI-generated contracts is not the technology itself but the confidence it can inspire.

AI-generated documents often appear professional and legally sophisticated, so users may assume they are comprehensive and accurate. However, a well-written clause is not necessarily an appropriate clause for the parties who are part of the agreement.

Many contractual disputes arise not because a document is poorly written, but because it fails to address the specific circumstances of the parties involved.

Businesses that rely exclusively on AI may overlook issues that an experienced lawyer would identify through discussion, negotiation, and risk assessment.

The Importance of Dispute Resolution Clauses

One area where AI-generated contracts frequently fall short is dispute resolution planning.

Many businesses focus heavily on commercial terms while paying little attention to the provisions governing how disputes will be resolved.

A carefully drafted dispute resolution clause can save considerable time and expense by specifying matters such as:

• Whether disputes should be referred to mediation before litigation;
• Which court has jurisdiction;
• Whether arbitration is appropriate;
• Applicable governing law; and
• Time limits for bringing claims.

Generic or poorly tailored clauses can create additional disputes about the dispute process itself, increasing costs and delaying resolution.

Can AI Reduce Disputes?

Despite these risks, AI should not be viewed solely as a source of potential problems.

Businesses do use and should use AI but it is essential that it is used appropriately. As AI can help identify inconsistencies, highlight missing provisions, improve contract review processes, and assist legal professionals in producing more efficient and accurate documents.

The key is to recognise AI as a tool rather than a substitute for legal judgement.

Used alongside experienced legal advice, AI can enhance contract quality and reduce the likelihood of disputes. Used in isolation, it may increase the risk of uncertainty and conflict.

Conclusion

AI-generated contracts are likely to become a permanent feature of the commercial landscape because they offer convenience and cost savings that many businesses find attractive.

However, contracts are ultimately about managing risk and protecting commercial relationships. No AI system can fully understand the unique objectives and circumstances of every business transaction.

Businesses should therefore approach AI-generated contracts with caution. While technology can streamline the drafting process, legal expertise remains essential in ensuring that agreements are tailored to the parties’ needs.

In many cases, the cost of obtaining legal advice at the outset is significantly lower than the cost of resolving a dispute that could have been avoided through careful drafting.

As AI continues to evolve, the most effective approach is likely to be a combination of technological efficiency and professional legal judgment—a partnership that helps businesses prevent disputes rather than merely resolve them.