Executive Summary: AI-generated contracts can create significant legal exposure when businesses rely on generic language without legal review. Broad indemnification clauses, unclear ownership terms, unfavorable dispute provisions, and missing protections can create liability that far exceeds the value of the agreement. Use AI as a drafting aid, not as a substitute for legal judgment.

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Halloween is full of things that are supposed to scare you. Your contracts should not be one of them.

Yet businesses are increasingly using AI tools to draft agreements, revise terms, summarize contracts, or generate entire documents without legal review. The result may look polished. It may even sound legally sophisticated. That does not mean it protects your business.

The real danger is not the clause you recognize. It is the clause you do not understand, the provision that was omitted entirely, or the language that creates an obligation you never intended to accept.

You don’t know what you don’t know. And a bad contract has a way of coming back long after it was signed.

1. AI Can Draft Language Without Understanding Your Business

AI systems generate text based on patterns. They do not know your actual risk profile unless you provide every relevant fact, and even then, the output still requires legal judgment. A generic agreement may fail to account for:

• Your industry
• New York law
• Your payment structure
• Your insurance coverage
• Your bargaining position
• Your termination rights
• Your actual operational risks

A contract can be grammatically perfect and legally harmful at the same time.

If an AI-generated agreement includes obligations your business cannot realistically meet, the problem does not disappear because a machine drafted the language. Once signed, the contract may be binding.

2. Indemnification Clauses Can Shift Massive Liability

Indemnification provisions are one of the easiest places for businesses to get into trouble. These clauses determine who pays when claims, damages, lawsuits, or third-party losses arise. A poorly drafted provision may require your business to indemnify the other party for:

• Its own misconduct
• Claims outside your scope of work
• Regulatory violations
• Third-party lawsuits
• Legal fees
• Conduct you did not control

AI-generated contracts frequently use broad boilerplate because broad language is common in commercial agreements. That does not mean you should accept it.

If the clause is not narrowed to the actual transaction, your business may take on liability far beyond the value of the deal itself.

3. Ownership and Intellectual Property Terms Can Create Permanent Problems

AI-generated agreements often include generic intellectual property language that transfers more than the parties intended. A service provider may unknowingly assign:

• Pre-existing materials
• Internal methods
• Templates
• Software
• Branding elements
• Proprietary processes

The reverse also happens. A business assumes it owns the work product it paid for, only to discover the contract never actually transferred ownership.

Legal Illustration: A marketing company uses AI to draft a service agreement for a new client. The agreement contains broad language assigning “all materials, methods, systems, and intellectual property” created or used during the engagement. Months later, the client argues that the company transferred ownership of templates and processes it had been using for years.

The contract now creates a dispute that careful drafting could have prevented.

4. Dispute Resolution Clauses Can Lock You Into the Wrong Forum

AI tools routinely generate arbitration clauses, forum selection provisions, and governing law terms because they appear in many contract templates. 

Those clauses can substantially affect your rights. You may unknowingly agree to:

• Arbitration instead of court
• Litigation in another state
• Waiver of jury trial rights
• Shortened deadlines for claims
• Mandatory mediation before filing suit
• Fee-shifting provisions

A business in New York can easily end up contractually required to resolve a dispute in another jurisdiction because the AI-generated agreement inserted a generic governing law provision.

That’s not a harmless drafting error. It can increase legal costs immediately.

5. Missing Clauses Can Be Just as Dangerous as Bad Ones

The most serious problem with AI-generated contracts may be what is not included. A contract may omit:

• Clear termination rights
• Payment deadlines
• Late-fee provisions
• Confidentiality protections
• Insurance requirements
• Limitation of liability clauses
• Non-solicitation language
• Data security obligations
• Procedures for resolving scope disputes

AI cannot identify a missing protection unless the prompt asks for it.

That creates the central problem: the person generating the agreement has to know enough to request the right provisions in the first place.

Review the Contract Before the Ghost Comes Back to Haunt You

A contract is easiest to fix before it is signed. Once a dispute starts, the language becomes evidence.

At that point, unclear terms, missing protections, broad indemnification obligations, and poor dispute provisions stop being drafting issues. They become litigation problems.

Using AI to help organize ideas or create a starting draft may save time. Treating the output as finished legal work creates unnecessary risk.

Rodriguez-McCloskey PLLC reviews and drafts business agreements with direct attention to the actual transaction, the parties involved, and the risks your business is taking on. Contact us today before signing a contract that may come back to haunt you.

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