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While the potential of an AI contract generator and its manifold benefits aren't lost on modern legal counsel, taking advantage of this relatively new and revolutionary mechanism hasn't been easy for the vast majority.

Their inability to leverage AI for contract generation often stems from concerns about its security and reliability, as well as insufficient knowledge of what an AI contract generator is and best practices for its implementation.

So, in this guide, we will take you through all that you need to know about AI contract generators, arming you with the right knowledge and mindset to take your contracting processes to another level.

What is an AI contract generator?

In simple terms, an AI contract generator is a software tool or digital platform that leverages Artificial Intelligence (AI) in drafting, reviewing, and customizing legally binding business agreements.

AI contract generators are known to imitate human decision-making capabilities by analyzing multiple lines of text in business documents, extracting relevant information, and generating contract drafts with the right definitions, terms, and legal considerations.

Manual contract generation processes are already getting relegated by automated platforms like Contract Lifecycle Management (CLM) systems. But, with the proliferation of AI in the legal industry, businesses are witnessing new levels of efficiency, and soon, traditional CLMs without integrated AI functionalities may find themselves playing catch-up.

How do AI contract generators work?

At their core, AI contract generators are built upon sophisticated Natural Language Processing (NLP) and machine learning techniques, featuring an enormous amount of historical contracts. Thus, they understand what a contract should look like in a wide variety of legal and business contexts.

They are designed to understand the specific needs and requirements of a contract by analyzing the information provided by the user. This information may include the type of contract, parties involved, terms and conditions, deadlines, and any specific clauses that need to be incorporated.

Once the user inputs the necessary prompt, the AI contract generator then goes to work, pulling from its extensive database of historical contracts to generate a dynamic, adaptable document that aligns with the nuances and requirements of the industry, jurisdiction, or individual business.

Upon generating the contract draft, the tool allows its users to fine-tune the document to meet their specific needs, adding or modifying clauses as required.

Platforms like SpotDraft go beyond contract drafting, allowing users to leverage AI in collaborative editing, contract review, and contract analysis.

How AI is revolutionizing the contract generation process

The traditional contract generation process as we know it is characterized by back-and-forths, elevated risks of errors and conflicts, and a significant investment of human, financial, and time resources.

But with the recent proliferation of AI in contract management, business teams, and legal professionals do not only get to see the last days of manual, cumbersome processes but also achieve more business goals with significantly fewer physical, mental, and durational resources.

#1 Accelerated contract drafting

An AI contract generator is typically trained using data from a vast collection of existing contracts. Its enhanced and in-depth knowledge of contracts makes it capable of generating robust contract drafts faster than humans.

AI-generated contract drafts are typically fortified with standard provisions, definitions, and almost every element the business engagement requires. In addition to this, the best AI contract generators help with templatizing contracts so businesses can use them repeatedly without needing to start from scratch.

SpotDraft AI goes a mile further by allowing you to generate templates in more ways than the typical AI contract generator. For instance, you can upload business documents into SpotDraft AI, and the system will use them to generate a full-blown contract template with its MS Word plugin, Draftmate AI.

Also read: Unlocking the Potential of AI in Contract Drafting

#2 Enhanced due diligence

What’s more important than a quick contract? A safe one! Indeed, it isn’t enough to cook up a draft from a rich database of historical contracts. You need to ensure that the contract you’re serving is not only robust but safe for your organization and its business partners.

Thanks to NLP and its access to a robust database of contracts, legal frameworks, and industry standards, AI contract generators are capable of identifying potential risks, ambiguities, and inconsistencies in contracts. They can also highlight clauses that might need further attention and provide suggestions for improved wording or negotiation strategies.

SpotDraft AI offers a unique due diligence process that allows you to ask direct questions about your contract or specific areas of the contract in plain English and get answers generated and sent to your email.

You can watch a demo of this process here.

By leveraging AI for contract review processes, legal teams are able to shrink hours of due diligence into minutes without compromising on quality.

Also read: How AI Contract Review Tools are Transforming Legal Workflows

#3 Cost savings and resource allocation

AI-driven contract generation not only saves time but also reduces operational costs. The automation of contract drafting and review tasks minimizes the need for extensive manual labor. Legal professionals can allocate their time to more strategic and value-added activities, such as negotiating complex terms or providing true legal counsel.

#4 Improved access to insights

AI contract tools provide an unprecedented level of data analysis and insights. Having been trained on a vast number of contracts and legal documents, AI systems can identify trends, common clauses, and negotiation tactics in record time. This information can be invaluable for legal teams, allowing them to make more informed decisions and negotiate contracts more effectively.

SpotDraft AI, for instance, uses its proprietary Smart Data Capture to pull metadata from contracts, offering a concise summary of its findings and empowering smarter decisions across the board.

Also read: AI in Contract Analysis: Definition, Benefits & Tips for Success

General concerns surrounding the use of AI contract generators

AI is, indeed, a revolutionary technology. But it isn’t immune to skepticism and criticism. While AI contract generators have shown unprecedented capabilities and potential, they have also raised several concerns by industry experts, ethicists, and legal professionals.

We discuss some of these concerns below:

#1 Data privacy and security concerns

“Most organizations are realizing that they should have a policy in place for AI adoption, because, otherwise, there's a risk of customer data or confidential data being put into the public tooling.”

Ken Priore, ex-Director of Privacy, Atlassian
Mastering the Intersection of Law, Technology

Contracts typically contain sensitive business information that needs to be kept from unauthorized parties. However, using AI to generate contracts essentially gives the AI contract generator access to a considerable amount of this information. Many skeptics are concerned about this specific issue, and rightfully so!

Giving the wrong AI contract generator access to critical business information can significantly elevate risks of unwarranted exposure, and the legal repercussions in the aftermath of such incidents can be severe.

To address this, organizations must use trusted and well-established AI vendors and ensure these vendors have structured their systems in accordance with applicable data privacy and security standards like SOC-2, GDPR, and HIPAA.

#2 Concerns about accountability and liability

Critics are also concerned about the potential for errors during the use of AI contract generators, and in the event of such occurrences, questions have been raised about who should be held accountable.

Is it the AI tool vendor, the organization using the AI, or both? Determining this can be a lengthy and complicated process for both parties.

To mitigate this, always conduct a thorough testing and validation process before choosing any AI contract generator for deployment. Also, ensure you understand the terms of your vendor’s SLAs and ensure they’re held accountable for any lapses in their system.

#3 Concerns about unintended biases

AI systems learn from the data they are trained on, and if the training data contains any biases, these biases can be perpetuated in the contracts generated. This could lead to discriminatory or unfair terms and clauses within contracts, which not only have ethical implications but can also result in legal challenges.

To mitigate this concern, it's crucial to ensure that the training data used for AI contract generators is carefully curated, diverse, and rigorously screened to minimize biases. Ongoing monitoring and auditing of the generated contracts can also help identify and rectify bias-related issues.

#4 Misinterpretation of contexts

“Good lawyers (like good doctors) will – and need to – take the time to understand their clients, what they are seeking, and why. Judgment is needed as part of providing any legal advice. Computers cannot do this in the same way humans can.”

~ Sterling Miller, CEO Hilgers Graben PLLC

Ten Things: Artificial Intelligence – What Every Legal Department Really Needs To Know

AI, while remarkable in its capabilities, can sometimes struggle with the nuanced understanding of human language and context. Contracts often involve intricate legal language and can be highly specific to the parties involved and the industries they operate in. In some cases, AI may not fully grasp the context in which specific clauses are used, leading to inaccuracies or terms that do not align with the parties' true intentions.

To address this concern, organizations should maintain human oversight in the contract generation process. Legal professionals should review and verify the contracts produced by AI to ensure they accurately reflect each party's intentions and comply with legal requirements.

#5 Reliability and accuracy

While AI systems are incredibly accurate and constantly improving, they may still generate contracts with errors or inconsistencies. Legal professionals worry that relying solely on AI contract generators might lead to contracts that are not legally enforceable or do not adequately protect the interests of their organization.

To boost reliability and accuracy, organizations must invest in robust AI systems, continually update and fine-tune them, and provide proper training to legal teams on how to use AI-generated contracts effectively. Additionally, organizations should have contingency plans in place in case issues arise with the generated contracts to minimize the risks associated with inaccuracies.

Best practices for utilizing AI contract generators

AI contract generators are changing the game for legal professionals across industries. However, its effectiveness largely depends on your implementation techniques and ability to adapt the generated contracts to suit the specific requirements of your organization.

This section dives into proven best practices you should consider to get the best results from your chosen AI contract generator.

#1 Do not overlook human oversight

AI should be seen as a tool to aid legal professionals, not replace them. Collaborate with legal experts in your organization to review, fine-tune, and validate the contracts generated by AI. The goal is to catch any nuances, context-specific details, or unforeseen legal issues the AI may have missed.

This is particularly important when dealing with complex or high-stakes agreements. The human touch ensures that the final contract is not only legally sound but also aligned with the true intentions of your organization and its business partners.

#2 Tailor all generated templates to suit your unique needs

While AI contract generators can save significant time and effort, it's crucial to consider their outputs as starting points. Templates generated by AI are not one-size-fits-all. Each contract should be customized to reflect your specific requirements and the unique context of your agreements.

This is also an opportunity to enhance clarity and readability, making your contracts more user-friendly for all parties involved. You must understand that a contract isn't just a legal document but a communication tool that sets expectations and obligations.

#3 Invest in training

“If you think that you're doing everything perfectly, you're not going to grow. There's always an opportunity for self-improvement.”

~ Doug Luftman, ex-DGC, DocuSign

The Key to Success as an In-House Legal Counsel & Leader

AI contract generators are only as effective as the individuals using them. Invest in training for your legal team to ensure they are proficient in both the technology and the legal principles behind it.

Training should encompass structuring prompts to make the AI produce the right outputs, troubleshooting for errors, and staying up-to-date with the latest developments in AI technology. This ensures your team is harnessing the full potential of AI contract generators and also staying competitive in the legal industry.

#4 Maintain a regular evaluation schedule

Regularly assessing the performance of your AI contract generator is crucial to its ongoing success. Establish a regular schedule for evaluating its performance, identifying areas where it may fall short, and making necessary adjustments.

This evaluation process should involve feedback from your legal team and any other business units involved in the contracting process. Consider factors such as accuracy, efficiency, and the quality of the contracts. If you identify recurring issues or bottlenecks, address them promptly to improve the overall workflow and outcomes.

#5 Do your due diligence on your chosen AI contract generator

Choosing the wrong AI contract generator can have severe consequences for your organization. Your chosen tool should not only have robust functionalities but also align with your organization’s goals and policies.

Consider factors such as the platform’s reputation, the technology behind it, user reviews, and its track record in your specific industry.

Furthermore, ensure that the AI contract generator complies with relevant legal and regulatory standards. Your chosen AI contract generator must prioritize data security and privacy, implementing robust encryption and access control mechanisms, and complying with data privacy regulations such as GDPR, HIPAA, and other applicable laws.

The takeaway

“Artificial Intelligence just may well be the final frontier in terms of how legal services are utilized and provided.  As in-house counsel, don’t run away from it and don’t ignore it.  Rather, embrace it as, ultimately, it will allow you to do thing things lawyers love to do: thinking, analyzing, and counseling, while leaving the “grunt” work to the computer.”

~ Sterling Miller, CEO Hilgers Graben PLLC

Ten Things: Artificial Intelligence – What Every Legal Department Really Needs To Know

The world of contracting is currently witnessing a remarkable transformation, and we find ourselves at the nexus of innovation, where AI is not just a tool but a driving force that is reshaping the way we draft, negotiate, and manage contracts.

While AI contract generators are designed to take contracting processes to the next level of efficiency, they are not meant to replace human talent, empathy, and creativity. We hope this guide has helped you understand the fundamentals of AI for contract generation and that our best practices will not only help you choose the right AI contract generator for your organization but also use it to the best of its capabilities.

Want to give SpotDraft AI a try? You’re welcome to request a personalized demo.

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