ChatGPT for Contract Review: Risks & Why You Still Need a Lawyer

Artificial intelligence (AI) has a new and growing role in professional work. As options to use AI tools like ChatGPT expand, many seem eager to replace the traditional advice of an attorney with an easy-to-access chatbot. But while AI holds great promise, it is still far from foolproof. 

Besides the tendency to produce errors, AI tools simply lack the curiosity, trained judgment, and analytical skills of attorneys. By relying on AI, companies miss the professional assets only a lawyer can offer, and risk financial and reputation loss from bad contracts. In short, ChatGPT can tell you what a contract says, but it can’t tell you what it really means. 

What is the promise of AI in contract review?

Proponents of AI say it can replace much of the work of contract lawyers, from in-depth risk analysis to recommendations for language improvements. Some claim that AI can replace legal experts by providing cheap, rapid automated review of agreements. 

In reality, trusting AI for legal review opens both companies and law firms to extensive risk. ChatGPT and other AI tools don’t have the capability to interpret legal nuance. They don’t take into account jurisdiction-specific laws, and they aren’t guaranteed to be up to date on the latest policy changes. Privacy and security are massive concerns, and there’s no protection of the attorney-client privilege with a legal AI platform. 

Particularly for the niche areas of electronic payments litigation and fintech, the additional review of a trained legal professional remains essential. An experienced attorney is what stands between an airtight business arrangement and protracted litigation.

What does AI do well?

AI tools like ChatGPT do have some advantages that can make legal work quicker and more efficient.   

ChatGPT can help summarize the key elements of long contracts, saving professional time and potentially reducing some kinds of human errors. ChatGPT can easily summarize the payment schedule for merchant accounts or a list of assets in a business purchase agreement.  

An AI tool can also identify key terms and highlight specific sections that reference specific legal concepts.  

AI can be a powerful tool to assist lawyers, rather than replacing them. For example, AI can help find the resources lawyers need to answer nuanced questions or develop the draft of an agreement that a lawyer can then review and correct.

What are AI’s critical failures in contract review?

While AI advocates say generative AI tools are enough to protect client interests while keeping budgets intact, the reality is quite different. Reliance on AI tools can mean exposing your business to significant risk. Here’s a starting list of where AI falls short, and some handy examples to demonstrate the harm your business might experience:

Little knowledge of legal nuance

Terms in a contract do not always strictly align with what happens in the real world. Contractual interpretation is more art than science, and it’s the role of attorneys to argue on behalf of their clients’ interests. Let’s say a contract includes penalties upon triggering conditions. ChatGPT might have one idea of what makes a “triggering condition” under the contract. However, a seasoned lawyer can take into account a variety of factors, including documents and other evidence outside the contract that ChatGPT can’t see.

Lawyers also have specific training on contractual interpretation, which varies depending on the industry, legal norms, and the relationship between the parties. Only a fintech or payments industry attorney can say whether a clause merits a narrow or a broad interpretation. A “narrow” reading looks at the plain text of the provisions, while a “broad” reading takes other factors into account, such as the entirety of the parties’ business partnership. 

A recent win for Global Legal Law Firm’s client revealed how legal nuance can be the determining factor in winning or losing a case. A company tried to use a prior agreement with Global Legal’s client as leverage in new business negotiations between the parties. Global Legal’s attorneys challenged this, based on their experience and knowledge. This resulted in a ruling that the former agreement had no bearing on the development of a new agreement. This level of advocacy is impossible with ChatGPT alone. 

ChatGPT doesn’t know the full context of a specific contract, so it can, and often does, provide poor or erroneous analysis. Even if your company isn’t yet in litigation, you can’t rely on AI alone to know where you stand with a potential business partner. 

Lack of consideration of jurisdiction-specific regulations

Contracts typically have a governing law clause, which stipulates which jurisdiction applies in the event of a dispute. ChatGPT may fail to take this into account when summarizing a contract. Even if the AI tool does note which state’s law applies, it can, and often does, fail to interpret the contract consistent with those laws.

Let’s take the statute of limitations in a breach of contract case. This sets out how long you have to sue someone for breaking a legal agreement. In New York, it’s six years for most contracts, but only four years if it’s a contract for the sale of goods. An AI tool like ChatGPT can’t review a contract and say for sure if it’s for the sale of goods, and as a result, might default to the general timeline of six years. Someone who relies on this information might find they have lost their ability to sue, a situation that could have been easily avoided with a legal consultation.

AI tools are also often confused. It is possible for two businesses not based in a jurisdiction to name that jurisdiction as the venue for dispute resolution. Two companies with head offices in California might choose Delaware as the governing jurisdiction. An AI tool might see the California addresses of the parties and provide analysis based on California law, which doesn’t apply to the contract.

These are clear-cut cases where ChatGPT can produce errors. It doesn’t begin to explore what happens when there’s reasonable disagreement over governing law. For example, you might rely on a clause in the contract about jurisdiction, but the other party to the contract might apply to transfer the dispute to another jurisdiction. If that happens, only a lawyer can give you the right legal analysis and advice. 

Absence of attorney-client privilege

When you discuss your business contract or any matter within the lawyer-client relationship with your attorney, they must keep that information strictly confidential. There are rare and limited circumstances when a lawyer is allowed to break privilege. This secrecy extends to the contents of the contract in question and your concerns about it.

There are no such ethical safeguards when you put a contract into an AI tool and query the contents. There are no guarantees about who stores the information you provide whether the location of your data is secure. 

Legal AI tools depend on large language models (LLMs) to continually advance their sophistication. The models learn from the data that they receive. For legal LLMs specifically, accuracy suffers because courts closely safeguard legal documents to protect privacy. This leads to inaccuracies in the models. On the flip side, when you do give the LLM information, such as feeding it a contract and asking for analysis, you’re handing over what can be sensitive data for your business. 

LLMs also learn from the questions you ask the AI tools. There’s no telling who is listening to you ask for this information. Suppose you want to end a merchant processing agreement for legitimate business reasons. You might ask for a ChatGPT contract review, with the seemingly simple query, “how I can break this contract?” In the wrong hands, this question can damage your professional reputation, even if you have no intention of treating the other party poorly.

With a lawyer, your discussions stay in the room. The contents of the contract are only available to those with permission to see them.

Contra-factual bias

AI tools don’t like to tell users they are wrong. As a result, they assume everything you ask is true. If you query, “ChatGPT, why is my business successful?” the tool probably won’t start by saying, “Your business might not be successful. But if it is, here are some of the reasons why…” It is more likely to answer, “Your business has many attributes that correlate with success, such as high profit margins and a strong revenue stream.”

Legal LLMs can also have this bias toward assuming all elements of a query are true. So if you ask ChatGPT, “How can I sue this vendor for his breach of this contract?” the tool will assume the vendor has indeed broken the agreement. It won’t offer more nuanced advice, such as explaining how what looks to you like a breach might, in fact, be acceptable conduct under the law. The legal tool also won’t outline how, if a breach did occur, the vendor could defend themselves, making litigation a risky proposition for you. 

Besides the bias in favor of the person querying the tool, LLMs are notorious for other kinds of embedded biases. Because AI tools learn from the data they receive, they can and often do absorb biases in that information. Race, gender, and ethnicity bias in outputs is an ongoing problem for generative AI. It can be summed up in the adage, “garbage in, garbage out.”

Failure to look outside the box

An AI contract review looks at the black-and-white language of a contract, but fails to take into account other aspects of your business. ChatGPT won’t know how to ask all the questions that a lawyer does. Perhaps you’re entering into a new merchant processing agreement, but plan to sell your company in the next 6 to 12 months. This detail might impact the kind of agreement you want to make. In some cases, your failure to disclose your intent to sell might give new rights to the other party under the contract. 

An attorney can review the full scope of your business and how this contract fits into the ecosystem. While it might be true that ChatGPT can review a legal contract, it’s not true that an AI contract review can identify all the potential issues with a new agreement. The AI tool only responds. It doesn’t probe for more information, which can lead to gray areas or missing coverage. An AI tool wants to provide certain, confident answers, when going deeper might reveal it’s not as straightforward as you first thought. 

Why you should consult with an attorney

AI tools can help you summarize a legal contract. It’s great for getting quick information like payment schedules, dates, and deadlines about an agreement you have in place. But when it’s a new agreement, or you want to enforce any of the clauses, it’s essential to discuss the issue with a lawyer. This legal consultation can help you to:

• Identify potential risks to you or your business
• Remove or modify clauses that might be unenforceable
• Change the jurisdiction of the governing law to better support your interests
• Assess whether you or the other party has breached the contract
• Discuss actions to sue for or defend against a potential breach
• Analyze options to terminate the contract and the potential lasting effects of termination on your business
• Coordinate contractual language to be consistent with local laws and other agreements 
• Get an opinion about the appropriateness of the contract for your business

A lawyer can therefore offer you a broader perspective about the agreement: whether it’s good for you, how you can enforce it, and what you can do if there’s been a breach. These are all functions an AI tool does not have. When your business is at stake, it’s just not worth the risk. 

An attorney is a “sober second thought,” who sees you as a unique business owner. Your company has an individual history and operational environment, so your legal agreements should reflect your distinct challenges and vulnerabilities.

Work With Global Legal Law Firm

Global Legal Law Firm is a leader in the niche areas of fintech, electronic payments, and other complex business litigation. The in-depth knowledge of our attorneys has helped steer clients through challenging legal disputes. Based in San Diego and serving clients nationwide, Global Legal is a first-rate resource for business owners who want upfront advice on contract review or litigation representation. Contact us today to see if Global Legal is a good fit for your business.