Artificial intelligence is rapidly transforming the way businesses operate, from automating internal processes and enhancing customer service to supporting decision-making and content creation. As organisations increasingly adopt AI-powered tools and platforms, many are finding that their existing commercial contracts were not drafted with these technologies in mind.
Whilst AI can deliver significant efficiencies and commercial advantages, it can also introduce new legal, regulatory and operational risks. Businesses implementing AI solutions, procuring AI services or integrating AI into their own products should ensure their contractual arrangements adequately address these evolving considerations.
Whether you are a technology provider, supplier or customer, reviewing your contracts now can help reduce uncertainty, manage risk and protect long-term value as AI continues to develop.
Why Traditional Contracts May Not Be Enough
Many commercial agreements were drafted on the assumption that software would operate in a predictable and controlled manner. AI technologies often challenge those assumptions.
Unlike traditional software, AI systems may generate outputs that evolve over time, rely on large volumes of data, or produce results that are not always fully explainable. This can create uncertainty around ownership, accountability, compliance obligations and performance expectations.
Questions that rarely arose in traditional software agreements are now becoming central to commercial negotiations. For example, who owns AI-generated content? What happens if an AI-generated recommendation proves incorrect? Who is responsible for ensuring compliance with rapidly developing regulatory requirements? These issues often sit outside the scope of standard contract provisions and require more careful consideration.
As AI adoption increases, organisations should assess whether their existing agreements remain fit for purpose and whether additional protections are needed to address the risks and opportunities presented by emerging technology.
Intellectual Property and Ownership of Outputs
One of the most significant legal issues surrounding AI is ownership of intellectual property rights.
Businesses are increasingly using AI tools to generate marketing content, software code, reports, designs and data analysis. Whilst the commercial value of these outputs can be substantial, ownership is not always straightforward. Unlike traditional commissioned work, AI-generated outputs may involve contributions from multiple sources, including the user, the provider and the underlying AI model. The extent to which intellectual property rights arise in a particular output may also depend on the nature and level of human input involved.
Contracts should clearly define:
- Who owns any intellectual property rights arising in AI-generated outputs
- Rights to use and commercialise those outputs
- Ownership of training data and datasets
- Rights to future model improvements
- Restrictions on the use of confidential information
Organisations should also consider whether suppliers have the necessary rights to any third-party materials used within the AI system. A failure to address these issues at the outset can create uncertainty and potential disputes as the technology becomes more integrated into the business.
Data Protection and Regulatory Considerations
Data sits at the heart of most AI systems, making data protection a critical contractual consideration.
Many AI tools process significant volumes of information, which may include personal data, commercially sensitive information or confidential business records. Businesses therefore need clarity regarding how information will be collected, stored, used and protected throughout the relationship.
Contracts should clearly allocate responsibility for compliance, particularly where one party processes personal data on behalf of another or where the parties determine how and why personal data is processed. They should also address cybersecurity obligations, incident reporting requirements and the circumstances in which data may be transferred or shared with third parties.
Beyond data protection, businesses should also consider wider regulatory obligations. AI regulation continues to evolve at both a domestic and international level, and organisations should ensure sufficient flexibility exists within contracts to respond to future legal and compliance requirements without disrupting operations.
Liability, Warranties and Risk Allocation
Determining how risk should be allocated is often one of the most heavily negotiated aspects of any AI-related contract.
Unlike conventional software, AI systems may produce outputs based on probabilities rather than certainty. As a result, suppliers may be reluctant to provide broad warranties regarding accuracy or performance, while customers may seek additional protection where AI outputs influence business-critical decisions.
The appropriate balance will depend heavily on the use case. An AI tool used to assist with administrative tasks may present relatively limited risk. By contrast, an AI solution supporting financial decisions, customer profiling, recruitment processes or regulated activities could have far greater legal and commercial consequences if errors occur.
When reviewing contracts, businesses should pay particular attention to:
- Limitation of liability clauses
- AI-specific warranties
- Indemnities for third-party claims
- Service levels and performance commitments
- Compliance responsibilities
- Requirements for human oversight and review of AI-generated outputs
A well-drafted agreement should allocate responsibility in a way that is commercially realistic while providing both parties with certainty regarding their exposure.
Future-Proofing Contracts for Emerging Technology
One of the greatest challenges when drafting AI contracts is that the technology is evolving far more quickly than traditional software solutions.
A contract that accurately reflects a business’s requirements today may be obsolete within a few years as AI capabilities, regulatory frameworks and market expectations develop. Businesses should therefore seek to build flexibility into their contractual arrangements from the outset.
This may include mechanisms for reviewing and updating services, introducing new functionality, responding to regulatory change and implementing additional governance measures as technologies mature. Change control procedures, audit rights and clearly defined review periods can all help ensure that agreements remain effective over the long term.
Futureproofing is particularly important where organisations are entering long-term technology partnerships or embedding AI into core business functions. A contract should not simply address the technology as it exists today but should also provide a framework for managing developments that may arise during the life of the agreement.
Preparing Your Business for the Future of AI
Artificial intelligence presents significant opportunities for businesses across virtually every sector. However, many organisations are adopting AI technologies faster than they are reviewing the contractual arrangements that support them.
By proactively addressing intellectual property rights, data protection obligations, liability issues and governance arrangements, businesses can significantly reduce legal uncertainty and position themselves to take advantage of future technological developments.
As AI becomes increasingly embedded within commercial relationships, robust contracts will play a vital role in supporting innovation while safeguarding business interests.
At Herrington Carmichael, our Commercial & Regulatory team advises businesses on AI contracts, technology procurement, intellectual property, data protection and risk management. For businesses looking for a structured starting point, our AI Readiness Audit provides a practical review of current or proposed AI use, followed by a concise red flag report with clear recommendations. This can help businesses identify key legal, regulatory and commercial risks before AI becomes more deeply embedded in their operations. If your business is implementing AI solutions or reviewing existing technology agreements, our team can help ensure your contracts remain fit for purpose in an increasingly AI-driven world. Contact us now to get it touch with a member of our team.
