As generative AI becomes increasingly accessible and pervasive, many companies are experimenting with these tools to draft full legal agreements. For start-ups and businesses with limited resources, the appeal is obvious: AI can produce contracts quickly and at a fraction of the cost of traditional legal drafting. What once may have required days of attorney time and high legal fees can now theoretically be generated in minutes with a simple prompt.
While this efficiency is attractive, it comes with significant risks. AI-generated agreements frequently contain significant issues that ultimately make them unusable. Unlike an experienced attorney, AI lacks legal judgment, contextual understanding, and knowledge of specific client needs. It can generate provisions that appear polished on the surface but collapse under scrutiny.
One recurring issue is the inclusion of multiple conflicting provisions. For example, a recent AI-generated supply agreement included three different payment mechanisms for the same transaction: upfront payment, milestone-based installments, and payment upon delivery after invoicing. With three competing payment obligations for a single transaction, the contract leaves the payor guessing and sets the stage for potential disputes.
Another problem is language that reads like legal boilerplate but is, in fact, incoherent or legally meaningless. AI may generate complex wording that mimics the tone of a lawyer’s drafting, but it lacks the precision required in contract language. This can make agreements unnecessarily confusing and difficult to interpret. For example, a recent AI-generated commercial contract included the following dispute resolution provision:
“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.”
This dispute resolution clause has several problems. First, it does not identify the exact set of rules governing arbitration proceedings between the parties. More importantly, there are no such rules of the “American Chamber of Commerce” or the “Canadian Chamber of Commerce” and it is unclear what would be considered a “renowned Chamber of Arbitrations.” Finally, it is highly unlikely that parties resolving a dispute in Brazil would choose to apply American or Canadian-based arbitration rules. An attorney with even minimal experience in drafting arbitration provisions would not make these errors.
The underlying issue is that AI generates text based on patterns, not legal reasoning. It predicts what “sounds” like a contract without understanding enforceability, legal doctrine, or commercial practicality. Given the risks, companies should treat AI-generated contracts with caution. As such, attorney review remains essential to make sure agreements are clear, consistent, and tailored to the business’ needs.
