The use of generative artificial intelligence (Generative AI) for reviewing and/or drafting commercial contracts is on the rise. While using Generative AI in this context may seem appealing, it presents a myriad of risks that deserve consideration. Even where those risks have been carefully considered and balanced, commercial contracts which have been drafted (or reviewed) using Generative AI should still be subject to legal review and sign-off, before you sign on the dotted line.

Generative AI in commercial contracting

Aside from being the latest buzzword, Generative AI refers to AI systems that create new content based on patterns learned from existing data. In this context, Generative AI includes advanced tools for contract automation and review, document/contract summaries and scenario simulation.

Legal framework

Currently, there is no legal framework regulating the use of Generative AI in New Zealand, although we have no doubt that it won’t be long before there is! Despite this position, there are still potential legal pitfalls where using Generative AI could mean you inadvertently breach other laws (eg,  the Privacy Act 2020, Fair Trading Act 1986 (FTA), Consumer Guarantees Act 1993 (CGA) or Contract and Commercial Law Act 2017).

Time is money – minimise your risk

The efficiency of AI-driven due diligence means faster turnaround times. For example, Generative AI can quickly review, summarise and simplify large volumes of data, allowing businesses to move swiftly on opportunities. However, this is not without risk – what Generative AI currently delivers in terms of speed, it lacks in terms of other capabilities.

A few “do’s” and “don’ts” to keep in mind when using Generative AI:

• Do play around with it: It’s now a way of life – Generative AI’s involvement in our day-to-day is no longer optional, nor can it be avoided. It’s better to be aware of its impact than be naïve to its opportunities - i.e. understand its capabilities and limitations to best adapt its use.
• Do combine it with legal expertise: Lawyers go beyond just the words on the page – for example, identifying themes in contracts and/or highlighting stereotypical red flags in agreements. They don’t just consider what is in front of them but what should be in front of them. Legal expertise identifies the information gaps, asks the right questions, requests additional information that wasn’t provided, and of course, evaluates legality, proactively addresses compliance matters, and determines where the risks and opportunities lie.
• Do use the information it delivers and go further: Generative AI excels at identifying patterns or highlighting important contract terms, without understanding their full significance – human expertise remains crucial for interpreting the context of these patterns and the implications of terms, especially when a transaction involves subjective or nuanced factors. For example, whether a provision in a contract is unfair under the FTA; whether a contract should carve out application of the CGA; and/or identify the consequence of an unlimited indemnity.
• Don’t upload confidential, commercially sensitive or financial information into publicly available AI tools: Due to confidentiality and privacy obligations, under no circumstances should this information be shared using AI tools – once uploaded, it cannot be reversed and becomes part of the generated output for other users. Similarly, uploading agreements for review may breach the terms of those agreements (i.e., confidentiality obligations).
• Don’t assume regulatory/legislative compliance: Output using Generative AI may not comply with the latest changes or nuances in local laws and regulations. Generative AI tools are only as good as their data sources – the output can miss legislative updates or complex legal interpretations, and even hallucinate or fabricate inaccurate and outdated information. Expert legal knowledge is required to identify this and ensure legal compliance.
• Don’t rely on Generative AI for negotiations: Developing a negotiation strategy and advising on drafting variations requires an understanding of legal principles and human factors that Generative AI cannot replicate. It cannot make discretionary decisions that require human judgement, such as assessing the trustworthiness of a counterparty, the potential for future disputes or considering the ultimate goals and circumstances of your business.

While Generative AI provides valuable assistance in gathering, processing and outputting information, the role of a lawyer in drafting and advising on commercial contracts remains indispensable. Engaging a lawyer combined with using Generative AI (where appropriate) ensures that you can make informed decisions based on expert legal advice, safeguard your business, and have comfort that you are contracting on sound commercial terms.