AI tools such as ChatGPT, Claude and CoPilot are becoming part of everyday business.
Most businesses use AI help draft emails, summarise documents, generate ideas and explain complicated information in plain English.
As a collective, Australian lawyers are seeing the crossover from drafting emails to drafting legally binding contracts or reviewing legal work that has already been prepared for them.
We understand that it sounds tempting to ask AI to explain a clause in a contract, draft a letter of demand, tell you whether you have a legal claim or even prepare an entire contract.
However, being experts in the law, we also understand there is an important difference between using AI to help you understand something and relying on AI to make a legal decision that could affect your business.
We are already seeing the legal ramifications of what can happen when that distinction is missed.
Can I use AI for legal information?
We understand AI is a useful starting point when you are trying to understand a legality.
It is good to help you understand what a legal term means or understanding any issues that you need to consider before entering a commercial agreement.
We have had new clients speak to us, pre-prepared with questions they should ask us. Used this way, AI can help you become better informed before you speak with any lawyer.
The problem we see is when a business owner moves from understanding the law to applying the law to their circumstances.
AI can produce an argument that sounds extremely convincing. However, that does not necessarily mean the argument is legally correct or would stand up if challenged.
This is where a legal ‘reality check’, where speaking with a human lawyer enables you to understand what limitations AI has incorrect or not considered and how to rectify this.
Be careful using AI to draft commercial contracts
This is one area where businesses should be particularly cautious.
A contract created by AI can look professional yet still contain serious problems.
We have received AI-generated contracts where the wrong parties are named in the contract.
This is an issue because if the wrong person, company or entity is named, you may find that the party you intended to hold responsible is not actually bound by the agreement. This can make it more difficult to enforce the contract, recover money owed or rely on rights if something goes wrong.
AI can generate beautifully worded clauses without necessarily understanding the commercial structure sitting behind the agreement.
That creates an important question for business owners:
If something goes wrong, will this contract protect you in the way you think it will?
That is a very different question from whether the contract looks professional.
AI-generated contracts take longer to correct
There is an assumption that generating the contract yourself and asking a lawyer to “quickly check it” saves money. However, the opposite tends to occur.
Any lawyer looking after your best interests, would review an AI-generated agreement first to work out what the AI has done, identify what is missing or incorrect and then potentially restructure or redraft substantial parts of the document.
In some circumstances, it may have been more efficient to have the agreement drafted correctly from the beginning.
Using AI during a legal dispute can affect your position
Another risk arises when people use AI to handle a dispute before obtaining legal advice.
AI makes it incredibly easy to draft a confident response to the other side. But what you say during the early stages of a dispute can matter later.
We’ve spoken with other lawyers who are seeing the same thing we are – people seeking legal advice after they have already used AI to communicate with the other party in a dispute.
While AI can help a person put their thoughts into words, legal correspondence can have consequences that may not be obvious at the time. The person using AI may unknowingly concede an important point, make a statement that affects their legal position, or take an approach that a lawyer would have advised against.
When a lawyer becomes involved later in the dispute, they need to work within what has already been communicated. This can make the matter more complex and potentially increase the time and cost involved.
What initially seemed like a way to save on legal costs can sometimes end up costing more to resolve.
A simple letter of demand can still go wrong
A letter of demand may seem like something AI should be able to handle easily.
We have also seen AI-generated letters of demand sent to the wrong party or claiming less than the person may be entitled to. In one matter we have seen, a person used AI to prepare a letter demanding $10,000. After obtaining legal advice, they discovered they could have been entitled to claim $40,000. Once a monetary position has been put in writing and communicated to the other party, changing that position can become more difficult.
This is another example of why obtaining legal advice early can be important. What may appear to be a relatively simple letter can have implications for how a dispute progresses.
Be careful with evidence
If you are involved in litigation or another formal legal process, be very cautious about asking AI to prepare your evidence for you.
Your evidence needs to be your evidence. You may ultimately have to answer questions or be cross-examined about what has been submitted.
AI can help organise information, but relying on it to construct your account creates problems if the resulting document does not accurately reflect what happened or how you would explain it yourself.
Consider what information you are putting into AI
Another issue businesses should not overlook is confidentiality.
Before uploading a contract, dispute correspondence, employee information, customer information or commercially sensitive material into an AI platform, consider exactly what information you are providing and how that platform handles it.
Lawyers have particularly strict confidentiality obligations. As lawyers, we do not place client’s confidential details into a general AI platform because as lawyers, we must protect the information our clients give us.
Businesses should apply the same caution to their own confidential and sensitive information.
When can my business use AI for legal matters?
AI can be extremely useful for helping you learn, organise your thoughts and understand the questions you should be asking.
The risk increases significantly when AI starts making or influencing decisions that have legal or financial consequences.
That includes:
- drafting important contracts;
- responding to a dispute;
- preparing evidence;
- sending a letter of demand;
- deciding how a business should be legally structured; or
- determining what your rights or obligations are in a particular situation.
The more significant the potential consequence of getting something wrong, the stronger the reason to obtain professional advice.
AI can be useful, it just isn't your lawyer
Our lawyers at Prosper Law are not anti-AI. Used appropriately, AI helps business owners understand information and prepare better questions.
But we have witnessed circumstances where a seemingly small error due to using AI alone becomes expensive.
If you are preparing an important contract, setting up a business structure or dealing with a dispute, getting legal advice early helps you avoid having to fix an AI-generated problem later.
If you’re unsure whether something you’ve prepared using AI could put your business at risk, speak with our experienced lawyers before you act on it. We can review what you’ve prepared, explain any potential risks and help you make an informed decision about what to do next.
Frequently Asked Questions
Is a contract written by ChatGPT legally binding in Australia?
A contract does not automatically become invalid simply because it was drafted using ChatGPT or another AI tool. Whether an AI-generated contract is legally binding will depend on the circumstances and whether the legal requirements for an enforceable agreement have been met.
The bigger issue is whether the contract protects your business, accurately reflects the agreement and contains the terms you may need if something goes wrong.
Who is responsible if AI gives my business incorrect legal information?
Using AI does not generally shift responsibility for a business decision to the AI platform. If your business relies on incorrect or incomplete AI-generated information and acts on it, your business may still have to deal with the legal and financial consequences.
This is one reason important legal decisions should be checked by our qualified lawyers who can consider your specific circumstances.
Can I ask ChatGPT to review a contract someone has given me?
You can use ChatGPT to help explain unfamiliar terminology or identify questions you may want to ask about a contract. However, an AI review is not the same as receiving legal advice.
Our experienced lawyers consider how the clauses interact, what may be missing, your risks and whether the agreement protects your interests before you sign it.
Should I tell my lawyer if I have already used AI for a legal matter?
Yes. If you have used AI to draft a contract, prepare correspondence, respond to a dispute or create another legal document, give your lawyer the complete information about what has already been prepared or sent.
This allows your lawyer to understand what has happened and advise you on the appropriate next steps.
Can I use an AI-generated contract as a template for my business?
You should be cautious about repeatedly using an AI-generated contract as a business template without having it legally reviewed first. An error or missing clause in the original document could then be repeated across multiple customers, suppliers or transactions.
Having an appropriate contract prepared or reviewed for your business gives you a reliable starting point for future agreements.
Is information I put into ChatGPT protected by legal professional privilege?
Communications with an AI platform should not be assumed to have the same legal protections as confidential communications between you and your lawyer.
If information relates to a dispute, potential litigation or sensitive legal advice, consider speaking to us to obtain legal advice before uploading that material to a general AI platform.
About the Author
Farrah Motley
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