Risks of Relying on GenAI Tools to Draft Commercial Contracts Without Legal Oversight

Generative artificial intelligence tools are rapidly transforming the way businesses approach documentation and content creation. In the commercial sphere, many organisations are now using GenAI platforms to draft contracts, standard terms and conditions, supplier agreements, and other transactional documents. While these tools offer speed, efficiency, and cost savings, relying on them without appropriate legal oversight presents significant risks. Commercial contracts are not merely administrative documents; they allocate risk, define rights and obligations, and protect strategic interests. When drafted without expert review, even subtle errors or omissions can have serious financial and legal consequences.

Limitations of Contextual Understanding

GenAI systems operate by analysing patterns in data and generating text based on probabilistic models. They lack legal judgment, contextual awareness, or an understanding of commercial nuance. As a result, AI-generated contracts may appear polished and coherent while failing to reflect the specific regulatory environment, industry requirements, or commercial realities of the transaction.

For example, a contract generated for cross-border services may omit critical jurisdiction-specific clauses, such as mandatory consumer protections, data localisation requirements, or governing law provisions aligned with the relevant legal system. Without legal review, businesses risk entering into agreements that are partially unenforceable or misaligned with applicable law.

Inadequate Risk Allocation and Liability Provisions

One of the core purposes of a commercial contract is to allocate risk between parties. Limitation of liability clauses, indemnities, warranties, and termination provisions must be carefully tailored to reflect the nature of the transaction and the parties' bargaining power. GenAI tools typically generate generic clauses that may not adequately protect a company’s interests.

For instance, a limitation of liability clause might fail to carve out exceptions for fraud, confidentiality breaches, or intellectual property infringement. Alternatively, it may cap liability at a commercially inappropriate amount. Without expert scrutiny, these gaps can expose businesses to significant financial liability or restrict their ability to recover losses in the event of breach.

Regulatory and Compliance Exposure

Commercial contracts often intersect with complex regulatory frameworks, particularly in sectors such as financial services, healthcare, technology, and data-driven industries. Relying solely on GenAI tools increases the risk of non-compliance with sector-specific regulations, data protection laws, or anti-corruption obligations.

AI-generated contracts may not adequately address statutory requirements for disclosures, licensing, or reporting. In jurisdictions with evolving regulatory landscapes, such as the United Arab Emirates or the European Union, failure to incorporate up-to-date legal obligations can lead to regulatory penalties and reputational damage. Legal oversight ensures that contracts align with current legislation and regulatory expectations.

Confidentiality and Data Security Concerns

Using GenAI platforms to draft contracts may also raise confidentiality and data protection issues. Businesses often input sensitive commercial information, pricing models, trade secrets, or personal data into AI tools to generate tailored drafts. Depending on the platform’s data policies, this information may be stored, processed, or used for model training.

Without proper safeguards and due diligence, organisations risk exposing confidential information or breaching data protection obligations. Legal oversight is essential to assess whether the use of AI tools complies with contractual confidentiality commitments and applicable data protection laws.

Ambiguity and Drafting Inconsistencies

AI-generated contracts can contain subtle inconsistencies, conflicting clauses, or ambiguous language. For example, defined terms may be used inconsistently, or cross-references may not align correctly. While such errors may appear minor, they can create interpretative disputes and undermine enforceability.

Ambiguity in key provisions such as payment terms, performance standards, or dispute resolution clauses can lead to costly litigation or arbitration. Experienced legal professionals identify and rectify these drafting issues, ensuring clarity, coherence, and internal consistency throughout the document.

Overreliance and False Sense of Security

One of the most significant risks of relying on GenAI tools is the false sense of security they may create. The generated language is often fluent and authoritative in tone, which can lead non-legal professionals to assume the document is legally sound. However, legal validity depends not only on structure and wording but also on substantive accuracy, commercial alignment, and regulatory compliance.

Overreliance on AI may also discourage businesses from seeking timely legal advice, particularly in smaller organisations seeking to reduce costs. In the long term, the financial consequences of an inadequately drafted contract can far exceed the savings achieved by avoiding professional review.

Strategic and Commercial Misalignment

Contracts are strategic tools that reflect a company’s broader commercial objectives, risk appetite, and long-term relationships. A generic AI-generated agreement may not align with the organisation’s negotiation strategy or commercial priorities. For example, certain industries rely heavily on relationship-driven arrangements in which flexibility, mechanisms for variation, or step-in rights are crucial. Without tailored drafting, businesses may find themselves constrained by rigid terms that limit operational agility or weaken their negotiating position in future dealings.

The Appropriate Role of GenAI in Contract Drafting

This is not to suggest that GenAI tools have no place in contract drafting. When used responsibly, they can assist with initial drafts, clause comparisons, summarising agreements, and streamlining document management processes. However, they should be viewed as supportive tools rather than substitutes for legal expertise.

The most effective approach is a hybrid model in which AI enhances efficiency while qualified legal professionals provide oversight, contextual judgement, and strategic alignment. Legal review ensures that contracts are customised to the transaction, compliant with applicable law, and structured to protect the organisation’s interests.

Generative AI offers powerful capabilities that can improve efficiency in commercial operations. However, relying on these tools to draft commercial contracts without legal oversight carries substantial risks, including inadequate risk allocation, regulatory non-compliance, confidentiality breaches, drafting ambiguities, and strategic misalignment. Commercial contracts are foundational to business relationships and risk management. While GenAI can support the drafting process, it cannot replace the analytical judgement and professional responsibility of qualified legal advisers. Organisations that integrate AI thoughtfully, while maintaining robust legal oversight, will be best positioned to harness innovation without compromising legal certainty or commercial protection.

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This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.