The excitement around AI tools like ChatGPT has led many to use them in creative and productive ways, but there are also significant dangers to misusing them—especially when it comes to drafting business contracts. One of the worst decisions you could make is to rely on ChatGPT as your de facto attorney. As a transactional attorney and mediator, I’ve observed firsthand the issues this can cause. From December 2023 to May 2024, I saw a lull in transactional cases, only to experience a dramatic surge in mediation requests starting in June 2024. The main culprit? DIY contracts generated by AI that led to partner disputes.
In this article, I’ll explain why relying on ChatGPT for your contracts can lead to devastating outcomes, share cautionary tales from my practice, and underscore why understanding the content and implications of your contracts is so essential.
1. AI Lacks Legal Expertise and Contextual Insight
ChatGPT, like other AI models, lacks the nuanced understanding of contract law that only trained attorneys possess. While ChatGPT may produce well-phrased text, it cannot interpret laws, account for jurisdictional differences, or anticipate loopholes or ambiguities in language that can lead to disputes.
Cautionary Tale #1: Recently, I mediated a dispute between business partners who had used ChatGPT to create their partnership agreement. The AI-generated contract didn’t include key provisions on profit-sharing or conflict resolution. When the partners later disagreed on dividing profits, the contract offered no guidance, leading to a protracted, costly dispute that could have easily been avoided with professional drafting.
2. Business Contracts Have Real-World Consequences
Contracts are legally binding documents that carry real-world weight. When a contract is poorly drafted, even minor omissions or ambiguities can lead to disastrous financial or legal consequences. AI lacks the ability to ensure enforceability and often overlooks critical elements that can lead to liability.
Cautionary Tale #2: In one mediation case, a client had used ChatGPT to draft a supplier contract that unintentionally waived their right to terminate the agreement. When the supplier began delivering substandard products, the client discovered they couldn’t cancel the contract without incurring heavy penalties. This type of oversight can have lasting financial implications that are difficult to undo.
3. Essential Provisions Are Often Missing in DIY Contracts
A strong contract doesn’t just cover the main points; it anticipates a range of possible outcomes and issues. Contracts generated by AI or inexperienced drafters often overlook critical provisions, such as dispute resolution, governing law, and confidentiality. ChatGPT simply doesn’t have the insight needed to foresee and address these essential clauses.
Cautionary Tale #3: In another case, a client came to me after a DIY contract drafted by ChatGPT failed to address intellectual property (IP) rights in a partnership agreement. Both parties assumed they had exclusive rights to the developed product, leading to a legal dispute over IP ownership that could have been prevented by including a clear IP allocation clause.
4. AI Misinterpretations Can Lead to Costly Errors
Using ChatGPT for contract review can be just as risky as using it to draft contracts. ChatGPT can misinterpret legally complex language, leading to advice that is incorrect and, sometimes, devastating.
Cautionary Tale #4: In one mediation case, two partners were expanding an existing business with the help of an investor who was supposed to handle business operations, while the original partner focused on creative development. The investor requested control over the company website, claiming it was necessary for the expansion. The creative partner, unsure if the contract required this, put the agreement into ChatGPT and asked if he was legally obligated to release the website access. ChatGPT’s response mistakenly indicated that the partner had to release the website to the investor.
However, the contract didn’t actually require this transfer. The creative partner, trusting ChatGPT’s interpretation, handed over control. The investor ultimately failed to deliver on promised commitments and, six months later, still hadn’t done anything to support the business expansion. Despite this, the investor now held the website’s access and demanded a substantial buyout for its return, leaving the creative partner in a costly predicament.
5. AI Cannot Replace the Guidance of a Legal Professional
Contracts generated by AI often use boilerplate language that may not apply to your specific industry or jurisdiction. ChatGPT isn’t trained to account for local laws, which can significantly affect how contracts are interpreted and enforced. Unlike AI, a legal professional tailors each contract to meet the unique needs of your business and ensures that the document complies with applicable laws and best practices.
As a transactional attorney, I understand that my role extends beyond just drafting the document. I’m here to anticipate potential legal risks, ensure enforceability, and create a contract that reflects the business’s particular goals and needs. Contracts require careful, tailored drafting that only a trained professional can provide.
6. Understanding Your Contracts is Essential
Relying on AI to draft your contract not only increases legal risks but can also mean you don’t fully understand the agreements you’re entering. Every business owner should understand the terms of their contracts and how specific provisions might impact their business. Knowing your contracts also empowers you to make informed decisions in negotiations, reducing the likelihood of avoidable disputes.
As a mediator, I’ve seen too many conflicts arise simply because business owners didn’t understand their own contracts. Clear knowledge of your contractual obligations can prevent many misunderstandings and disputes down the line.
7. Legal Counsel Is Worth the Investment
Many business owners turn to AI tools like ChatGPT to save on legal fees, but the short-term savings don’t outweigh the potential long-term costs. A well-drafted contract from a qualified attorney is a wise investment, as it helps prevent the risk of costly disputes, legal fees, and damaged reputations. With a properly drafted contract, your business is protected, and you can rest assured knowing your agreements are legally sound.
Final Thoughts
While tools like ChatGPT can be valuable in many contexts, they aren’t suited to complex legal work like contract drafting. The risks associated with using AI to create legal documents are too great, and the consequences can be devastating for your business. As an experienced transactional attorney and mediator, I’ve seen the pitfalls of DIY contracts firsthand. Protect your business by seeking the guidance of a qualified professional and investing in well-crafted, reliable agreements.
A strong, well-understood contract isn’t just a legal document—it’s an investment in the stability and success of your business. Don’t let AI take the place of sound legal advice, because it could lead to a costly mistake that’s difficult, if not impossible, to undo.