Using AI to Draft Business Contracts: What You Should Know Before Relying on ChatGPT

Introduction

Artificial intelligence AI tools like ChatGPT are becoming increasingly popular in business, offering fast and low cost ways to automate everyday tasks. One area getting a lot of attention is AI generated contract drafting and for good reason. The idea of having a contract ready in seconds, without legal fees, is appealing.

But before you ask ChatGPT to draft your next business agreement, it is worth understanding the risks, limitations, and legal consequences that come with using AI for legal documents especially in Australia.

Why Businesses Are Using AI for Contracts

From small businesses to startups and consultants, many are experimenting with using AI tools to create:

Basic contract templates
Service agreements
Terms and conditions
Employment or subcontractor contracts

AI tools like ChatGPT offer speed, convenience, and cost savings, making them attractive alternatives to traditional legal services.

And while these tools can provide a useful starting point, relying on them alone can lead to serious legal gaps and compliance issues.

The Key Risks of Using AI to Draft Contracts

1. Inaccurate or Incomplete Clauses

Contracts must be accurate, clear, and enforceable. A clause that is missing one key word or written in the wrong legal context can make the whole agreement unreliable or even void.

AI generated contracts often skip over critical terms or misunderstand the business relationship. For example, if your business handles customer data, does the AI know to include privacy compliance or data protection obligations What about your refund policy under Australian Consumer Law

If these elements are left out, your business could be exposed, and you may not know until it is too late.

2. False Sense of Security

One of the biggest dangers is that AI can produce contracts that look professional but are not legally sound. The layout may be polished, the language formal, but the substance could be flawed, outdated, or not aligned with current Australian law.

This false sense of security can lead businesses to rely on contracts that havent been reviewed by a lawyer, which increases the risk of disputes, non compliance, or unenforceable terms.

3. Generic Content That Doesnt Fit Your Business

AI works by predicting patterns and language, not by understanding your commercial goals. It does not know your industry, your risk tolerance, or the nuances of your agreement.

Whether you are dealing with intellectual property, liability limits, payment terms, or indemnities, a one size fits all template cannot properly reflect your businesss specific needs.

This is particularly dangerous when negotiating with larger clients or suppliers, where a poorly drafted contract can leave you legally and commercially disadvantaged.

4. Lack of Regulatory Compliance

In Australia, business contracts are subject to multiple layers of legal regulation, including:

Australian Consumer Law ACL
Privacy Act 1988 Cth
Fair Work Act 2009

AI tools do not automatically apply these legal standards unless specifically instructed, and even then, they may not get it right. You cannot rely on a chatbot to catch every compliance risk.

5. Poor Drafting from Bad Inputs

AI is only as good as the prompt you give it. If your instructions are vague or incomplete, the output will be too. This creates a real risk of miscommunication, missing clauses, or terms that do not reflect what you actually intended.

It is a case of you do not know what you do not know, and that is exactly why AI drafting without legal oversight can be so dangerous.

Can AI Be Used in Business Contract Drafting at All

Yes but with caution.

AI can be a useful tool for generating a first draft, creating checklists, or helping you prepare a brief to give to your lawyer. It may help speed up the process or reduce costs in low risk situations.

But it should never replace proper legal advice when:

The contract involves money, liability, or risk
The relationship is ongoing, complex, or strategic
Your business must comply with specific laws or industry regulations

The Bottom Line: Dont Let AI Write the Fine Print Without Oversight

AI is evolving but it is not a lawyer. And when it comes to contracts, the risks of inaccuracy, misunderstanding, or missed legal obligations are too great to ignore.

If your business relies on contracts and most do it is essential to have them reviewed or drafted by a legal professional. AI can assist, but it should never be the final word.

Need Help Drafting or Reviewing a Business Contract

We work with businesses of all sizes to prepare clear, legally sound contracts that protect your interests and reflect your commercial goals. If you have already used AI to prepare a draft, we can review it and identify potential risks or gaps before they become a problem.