The advancement of artificial intelligence (AI) technology has led to its increasing application in various sectors, including the legal profession. One area where AI is being utilised is in contract generation. While AI-generated contracts offer numerous benefits, such as increased efficiency and reduced costs, they also present several challenges and potential issues. This article explores some of the common issues associated with AI-generated contracts.
Accuracy and Completeness
One of the main concerns with AI-generated contracts is the potential for inaccuracies or omissions. AI systems are trained on vast datasets of existing contracts and legal documents, but they may not always capture the requirements of specific situations or the latest legal developments. In New Zealand, where contract law is primarily based on common law principles and statutory provisions, AI systems may struggle to incorporate recent case law or legislative changes accurately.
For instance, the Contract and Commercial Law Act 2017 combined and modernised several existing laws related to contracts in NZ. An AI system not updated with this information might generate contracts referencing outdated legislation or fail to incorporate the latest legal requirements.
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Contextual Understanding
AI systems may lack the contextual understanding necessary to draft contracts that truly reflect the parties' intentions. While they can process and analyse large amounts of data, they may struggle to interpret the specific needs and circumstances of the contracting parties. This limitation can be particularly problematic in complex commercial agreements or contracts involving unique or novel situations.
In NZ, the courts place significant emphasis on the intention of the parties when interpreting contracts. AI-generated contracts may not adequately capture the commercial context, potentially leading to disputes or misinterpretations.
Compliance with New Zealand Law
Ensuring compliance with NZ law is crucial for any contract. AI systems trained on international datasets may not fully account for the specific legal requirements and nuances of NZ contract law. This could lead to the inclusion of unenforceable or invalid clauses, which may expose you or the other contracting party to penalties if there is a reliance upon them.
For example, the unfair contract terms provisions in the Fair Trading Act 1986 set out specific criteria for terms that may be considered unfair in standard form consumer contracts. An AI system not specifically tailored to NZ law might generate clauses that could be deemed unfair and thus unenforceable under these provisions.
Customisation and Flexibility
While AI-generated contracts can offer a degree of customisation, they may struggle with highly bespoke agreements that require significant tailoring. The inability of AI systems to fully adapt to unique circumstances could result in contracts that are overly generic or contain irrelevant provisions. Additionally, this lack of flexibility could potentially undermine the effectiveness and enforceability of the contract.
Privacy and Data Protection
AI systems require vast amounts of data to function effectively. They do this by learning from data people input to improve their output. AI models do not protect your information; any data you input into these AI systems is not private and will form part of their database.
If you put in sensitive business information, there is a chance that others could see or use it. Additionally, the Privacy Act 2020 imposes strict obligations on the collection, use, and disclosure of personal information. You may breach obligations you have to the other contracting party if their confidential information is leaked due to the use of an AI-generated contract.
Interpretation and Enforcement
NZ courts have established principles for contract interpretation, as outlined in case law. Specifically, these interpretation principles emphasise the importance of considering the contract's language, context, and commercial purpose. AI-generated contracts may sometimes use language or structures that are difficult to interpret using these traditional principles, potentially leading to enforcement challenges. They may also neglect to create defined terms unique to the agreement, which may affect the commercial agreement between the parties.
Cross-border Considerations
In an increasingly globalised business environment, many contracts in NZ involve cross-border elements. AI systems may not always adequately address the complexities of international contracts, such as:
- choice of law clauses;
- international dispute resolution mechanisms;
- jurisdiction issues; and
- compliance with international treaties and conventions to which NZ is a party.
Key Takeaways
While AI-generated contracts offer potential benefits in terms of efficiency and cost-effectiveness, they also present numerous challenges from a legal perspective. In NZ, where contract law involves common law principles, statutory provisions, and local commercial practices, AI in contract generation requires careful consideration and oversight. As AI technology evolves, these issues may be addressed through improved algorithms, more comprehensive training data, and better integration, particularly with New Zealand-specific law. However, for the foreseeable future, human expertise and judgment will remain crucial in the contract drafting process to ensure that AI-generated contracts meet the legal and practical requirements of our unique legal landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
