Can AI Help with Contracts? An Attorney's Perspective
In today’s fast-paced business environment, cost efficiency and speed are paramount. Business owners, particularly those operating small to medium-sized enterprises, face mounting pressure to streamline operations while managing expenses. Contracts, whether for vendor agreements, employment terms, or mergers, form the backbone of commercial transactions but often come with hefty legal fees. Enter artificial intelligence (AI), a technology promising to revolutionize contract drafting, review, and management. From a cost-cutting standpoint, AI offers tantalizing benefits. But its limitations warrant scrutiny, and users should be well aware of the risks.
The Promise of AI: Cost Savings and Speed
AI-powered tools, such as contract lifecycle management (CLM) platforms like Ironclad, Kira Systems, and LawGeex, have transformed how businesses approach contracts. These platforms leverage natural language processing (NLP) and machine learning to automate tasks traditionally performed by attorneys, including drafting, clause analysis, and risk assessment. For business owners, the appeal is clear: reduced legal costs and accelerated timelines.
Cost Reduction
Legal fees for contract work can be prohibitive. According to the American Bar Association, small businesses spend an average of $7,000 to $30,000 annually on outside counsel for contract-related matters. AI tools offer a cost-effective alternative. For example, platforms like LawGeex claim to review standard contracts in minutes, identifying problematic clauses at a fraction of the cost of human review, sometimes as low as $100 per contract compared to $500-$1,000 for attorney time. Subscription-based models further democratize access, allowing businesses to manage multiple contracts without engaging counsel for every document.
Speed and Efficiency
Time is money, and AI delivers speed. Drafting a NDA manually might take an attorney two to four hours, while AI tools like Ironclad claim to generate a tailored NDA in under 10 minutes using pre-approved templates. For business owners negotiating deals under tight deadlines, this efficiency can be a game-changer. AI also excels at scale, analyzing thousands of contracts for due diligence in mergers and acquisitions. (A task that once required weeks of associate labor). Kira Systems, for instance, claims to reduce due diligence time by up to 70%.
Empowering Business Owners
Beyond cost and speed, AI empowers non-lawyers to handle routine legal tasks. Tools like Rocket Lawyer and LegalZoom provide user-friendly interfaces for generating basic contracts, enabling entrepreneurs to create legally sound documents without immediate attorney involvement. These platforms use AI to customize templates based on user inputs, ensuring compliance with state-specific regulations. For startups with lean budgets, such tools bridge the gap between legal needs and financial constraints, allowing founders to focus on growth rather than legal overhead.
AI's Legal Nightmares: When Algorithms Go Awry
While AI’s benefits are undeniable, its misuse has led to high-profile blunders, underscoring the need for caution. Attorneys and business owners alike have learned the hard way that AI is not a substitute for human judgment.
Hallucinated Citations Haunt Courtrooms
In a recent case that underscores the growing pitfalls of AI in legal practice, a California judge, Michael Wilner, encountered a brief riddled with fabricated citations, as reported by MIT Technology Review. The attorneys, relying on AI tools like CoCounsel, Westlaw Precision, and Google Gemini, submitted arguments citing nonexistent articles, prompting judicial frustration. When pressed for clarification, the firm doubled down with a new brief containing even more errors, highlighting AI's propensity for "hallucinations"—generating convincing but entirely false information. This incident, part of a broader trend infuriating judges across courtrooms, illustrates a critical flaw: AI lacks the ability to verify the accuracy of its outputs against real-world legal sources, risking case integrity and client outcomes.
Phantom Clauses in the Machine
A chilling revelation from Stanford’s Human-Centered AI Institute further exposes AI’s legal frailties, showing that legal AI models hallucinate in at least one out of every six responses. In a simulated due diligence scenario for a merger, researchers tested leading legal AI tools on contract analysis. The models repeatedly misread critical clauses or fabricated nonexistent provisions, such as imaginary termination rights or liability limits, leading to dangerously inaccurate risk assessments. As detailed in the Stanford HAI study, these errors could spell financial disaster in real-world deals, highlighting AI’s critical blind spot: it cannot reliably decipher complex contractual subtleties without vigilant human oversight.
Ethical Issues in AI-Assisted Advocacy
In a stark reminder of AI’s professional perils, a federal judge in 2025 considered sanctions against attorneys who relied on an AI tool to draft a court filing in a prison conditions case, as reported by ABC News. The AI-generated brief included fabricated case law and inaccurate legal arguments, which the attorneys failed to verify before submission. This oversight drew sharp judicial scrutiny, threatening penalties and reputational damage. The case highlights the ethical imperative under Model Rule 1.1, which mandates that lawyers maintain competence by rigorously validating AI-generated work, lest they jeopardize client trust and judicial integrity.
A Warning for AI-Driven Contracts
The allure of AI in drafting contracts and business documents is undeniable, promising speed and efficiency in a high-stakes world. Yet, these cautionary tales reveal a darker truth: AI’s penchant for inventing phantom clauses, conjuring false citations, and misleading even seasoned professionals can lead to catastrophic consequences. From unenforceable agreements to courtroom sanctions, the risks of relying on AI without meticulous human oversight are stark. Business owners and attorneys alike must heed this warning: AI is a tool, not a substitute for expertise. Failing to scrutinize its outputs can unravel deals, erode trust, and invite legal nightmares that linger long after the algorithms fade.
A Collaborative Approach: AI and Legal Expertise as Partners
AI’s value lies in its ability to complement, not replace, legal expertise. Business owners can leverage AI to reduce costs and accelerate routine tasks, but every AI-generated output, whether a draft contract or risk analysis, must be reviewed by an attorney to ensure compliance, accuracy, and strategic alignment. This collaborative approach delivers efficiency while safeguarding against errors.
Best Practices for Business Owners
To integrate AI effectively with legal oversight, business owners should:
Use AI as a Starting Point: Employ platforms to generate initial drafts of standard contracts (e.g., NDAs, service agreements), but always engage counsel to review and customize these drafts for compliance with local laws.
Combine AI with Attorney Review: Use CLM tools to flag potential issues in contracts, then rely on attorneys to interpret and address these findings, particularly for high-stakes or complex agreements.
Educate Teams on AI’s Role: Train staff to view AI as a tool for efficiency, not a substitute for legal advice, ensuring all AI outputs are escalated to counsel for validation.
Partner with AI-Savvy Firms: Work with law firms that use AI to enhance efficiency while maintaining rigorous oversight, offering cost-effective services backed by expertise.
Understand AI’s Limited Context: Recognize that AI tools typically have not accessed your business’s existing contracts. Without this context, AI cannot ensure new drafts are free of conflicts with prior agreements. Attorneys must review all relevant contracts to identify and resolve potential inconsistencies, ensuring alignment across your contractual obligations.
The Attorney’s Evolving Role
For lawyers, AI is an opportunity to redefine their value. By delegating repetitive tasks to AI, attorneys can focus on strategic counseling, negotiation, and risk mitigation, areas where human judgment is indispensable. Firms that master this integration can deliver high-quality services at lower costs, strengthening client relationships.
Conclusion
AI offers business owners a powerful tool to reduce the cost and time of contract management, from drafting NDAs to conducting due diligence. When paired with legal expertise, AI platforms enable efficiency without sacrificing quality. However, horror stories of unenforceable contracts, missed clauses, and ethical breaches demonstrate the dangers of using AI without attorney oversight. The optimal approach is clear: AI and legal expertise must work in tandem. By leveraging AI for initial tasks and relying on lawyers for review and customization, business owners can achieve cost savings, speed, and confidence in their contracts. In an era of technological disruption, the partnership of AI and human insight remains essential for success. For those tempted to let a “ChatGPT’d” contract loose in the wild, consider Novel Law, a cost-effective beacon of legal expertise that polishes your AI-drafted docs into ironclad agreements.