I Used AI to Generate My Business Contracts. Now My Company Is Exposed.
- Jeff Chang
- 12 minutes ago
- 7 min read
It sounds efficient: ask an AI tool to draft your business agreements, get professional-looking documents in minutes, and move on to running your company. Plenty of business owners are doing exactly that for everything from contractor agreements to supplier contracts to shareholder arrangements. But when a relationship goes sideways, that is when the gaps in an AI-generated contract become painfully clear.
We have worked with business owners who learned this the hard way. They used AI tools to draft agreements that looked polished and covered many of the basics. But when they needed to enforce intellectual property provisions after a contractor left, hold a supplier accountable after a failed delivery, or deal with a co-owner who started putting personal interests ahead of the company, the contracts fell short in critical ways. The protections they assumed were in place simply were not there, at least not in a form that could be relied upon.
As AI-generated contracts become more common, we expect to see more businesses discovering similar gaps when it matters most.
The Problem Is Not That AI Writes Badly. It Is That AI Writes Generically.
Tools like ChatGPT can produce text that reads like a real contract. The formatting looks right. The language sounds legal. And for straightforward provisions, like basic payment terms or general project scope, AI-generated contracts can be a reasonable starting point.
The problem shows up in the areas that require legal precision tailored to your specific situation. Intellectual property ownership, termination rights, remedies when a business relationship falls apart, protections against self-dealing, and dispute resolution mechanisms are exactly those areas. These provisions need to account for the type of relationship, the applicable law, and the specific risks your business faces. A generic clause pulled from training data is not designed to do that.
Where AI-Generated Contracts Create Real Exposure
Contractor Agreements and Intellectual Property
Business owners often assume that if a contractor agreement says the company owns the work product, the company owns the work product. In practice, IP ownership for work created by independent contractors is governed by specific provisions of federal copyright law that impose requirements many business owners (and AI tools) are not aware of. A contract that uses the wrong legal framework, or that relies on a single provision where multiple overlapping protections are needed, can leave the business without clear ownership of work it paid to create.
The technical requirements for securing IP rights from independent contractors are different from those for employees, and they vary depending on the type of work involved. Getting this wrong is one of the most expensive mistakes a business can make, and it is one that AI-generated contracts get wrong regularly.
Supplier Agreements: What Happens When Things Go Wrong
Supplier relationships tend to work fine until they do not. A shipment arrives late or defective. A supplier raises prices mid-contract. A key vendor goes out of business or gets acquired. These are not unusual events. They are the normal risks of doing business with outside vendors. But when they happen, the supplier agreement is the document that determines what remedies you have, and AI-generated versions routinely fail to address these scenarios in a meaningful way.
AI tools tend to produce supplier agreements that focus on the "good path": scope of work, pricing, delivery terms. What they under-develop or miss entirely are the provisions that govern what happens when the relationship breaks down. Termination rights, cure periods, liability limitations, indemnification obligations, and remedies for non-performance are the provisions that matter most when a supplier dispute actually arises. And because these provisions need to reflect the specific risks of the relationship, including the nature of the goods or services, the cost of switching suppliers, and the potential downstream impact of a failure, generic language is particularly dangerous here.
A supplier agreement that gives you the right to terminate "for cause" sounds protective until you discover that the contract does not define what constitutes cause, does not specify a notice or cure period, and does not address what happens to pending orders, prepayments, or proprietary materials in the supplier's possession. These are the details that determine whether a termination right is actually usable or just decorative.
Shareholder and Operating Agreements: When Owners Stop Getting Along
Shareholder agreements and LLC operating agreements may be the worst candidates for AI drafting. These are not transactional documents. They are governance documents that define how decisions get made, how money gets distributed, and what happens when co-owners disagree or one of them starts acting in their own interest at the expense of the company.
AI tools tend to produce ownership agreements that cover the basics: ownership percentages, voting rights, general transfer restrictions. What they miss are the provisions that actually matter when the relationship between owners deteriorates. And in our experience, these relationships deteriorate more often than most business owners expect when they are setting up the company.
Consider what happens when a majority owner starts making decisions that benefit themselves at the company's expense, such as paying themselves an above-market salary, directing business opportunities to a side venture, or using company resources for personal purposes. A well-drafted operating agreement anticipates these scenarios and includes provisions that give minority owners meaningful recourse. An AI-generated agreement typically does not, because these protections need to be tailored to the specific ownership structure, the roles each owner plays, and the governance mechanisms that apply.
The same problem arises with exit scenarios. When a co-owner wants out, or when the remaining owners need to force someone out, the agreement needs to answer a series of interconnected questions: what triggers a buyout, how the business is valued, how the buyout is funded, and what the departing owner's obligations are during and after the transition. AI-generated agreements frequently include placeholder language on these topics that would be difficult or impossible to execute in practice.
These agreements also intersect with state-specific laws that AI tools are unlikely to account for. Massachusetts, for example, has statutory requirements under the Massachusetts Noncompetition Agreement Act (M.G.L. c. 149, § 24L) that affect how restrictive covenants are structured and enforced. An agreement that ignores these requirements may contain provisions that are unenforceable from the day they are signed.
The Deeper Risk: Undermining Your Own Legal Position
There is an additional risk that many business owners do not consider. Using a weak contract does not just leave your business exposed. It can actively undermine your legal position.
In trade secret disputes, for example, courts look at whether the business took reasonable steps to protect the information's secrecy. A contract with inadequate protections can be cited as evidence that the business did not treat the information as a trade secret in the first place. In shareholder disputes, a vaguely drafted operating agreement can leave both sides arguing over what the agreement means rather than what the agreement requires. In supplier disputes, a termination clause that lacks specificity can turn what should be a straightforward exit into protracted litigation over whether the termination was proper.
Ambiguity in a contract generally works against the party that drafted it, or in this case, the party that generated it with AI and presented it to the other side.
In other words, a poorly drafted contract can do more than fail to protect you. It can be used against you.
Why AI Cannot Solve This on Its Own
Some business owners, after learning about these risks, try to address them by giving the AI tool more detailed prompts. They ask ChatGPT to "include an IP assignment clause" or "add Massachusetts-specific non-compete language" and assume the result is adequate.
The problem is that you need to already know what is missing to ask for it, and you need to be able to evaluate whether the AI's response actually solves the problem. Effective contract drafting is not just about including the right topics. It is about how provisions interact with each other, how they will be interpreted under applicable law, and whether they actually accomplish what the business needs them to accomplish in a real dispute. That analysis requires legal judgment that AI tools do not have.
An AI tool will not tell you that a provision it generated conflicts with another clause in the same agreement. It will not flag that a restriction it drafted would be unenforceable in your state. And it will not warn you that the language it produced, while technically covering the right topic, is too vague to be useful when you actually need to rely on it.
What Business Owners Should Do
If you are currently using AI-generated contracts, or if you are considering doing so, here are practical steps to protect your business:
Review your existing agreements. Have a qualified attorney review the contracts you are currently using, particularly any agreements governing intellectual property, supplier relationships, or ownership interests. The gaps described above may already exist in your active contracts. Identifying them now gives you the opportunity to address them before a problem arises.
Do not rely on AI alone for high-stakes contracts. AI can be a useful tool for generating a first draft or getting a general sense of contract structure. But for agreements that govern intellectual property, business ownership, supplier obligations, and what happens when relationships end, AI-generated language should be reviewed and customized by an attorney who understands your business and the applicable law.
Build protections into your business relationships, not just your contracts. The contract is an important piece of protecting your business, but it is not the entire picture. How you manage confidential information, document business decisions, and handle transitions when relationships change all affect your legal position if a dispute arises.
Revisit your agreements when relationships evolve. A contract drafted for a narrow project or an early-stage business relationship may not provide adequate protections as the scope of the relationship expands. A supplier that started with non-critical components may now handle proprietary specifications. A co-owner who was a passive investor may now be running day-to-day operations. Reviewing agreements when the underlying relationship changes is a straightforward way to avoid gaps.
About Chang Law Group
Chang Law Group represents businesses in contract matters, commercial disputes, and cross-border transactions. Attorney Jeff Chang has nearly 20 years of experience drafting and negotiating commercial agreements, including contractor agreements, supplier contracts, shareholder agreements, and LLC operating agreements. He regularly advises business owners on structuring their business relationships to protect their interests before problems arise.
If you are concerned about whether your business contracts adequately protect your company, contact Chang Law Group for a consultation.
Contact:
Phone: (617) 307-1238
Email: info@jchanglaw.com
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Chang Law Group LLC: One Marina Park Drive, Suite 1410 Boston, MA 02210
This article is for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. The legal requirements for business contracts, intellectual property ownership, and commercial relationships vary by jurisdiction and depend on the specific facts of each situation. This article reflects general legal principles as of the publication date and should not be relied upon as a substitute for individualized legal counsel. Consult with Chang Law Group or another qualified attorney before making decisions based on this information. Chang Law Group is licensed to practice law in Massachusetts.
