In-Brief:
- Artificial Intelligence is transforming how businesses draft, interpret and manage contracts. As organisations increasingly turn to AI tools to generate agreements, analyse contractual terms and assess commercial obligations, an important question arises: are they fully aware of the legal risks they may be taking?
- A contract that looks convincing is not necessarily legally sound. AI can overlook critical protections, misinterpret contract obligations and produce wording that fails to protect a business under the applicable law. Confidence in the answer doesn’t guarantee accuracy.
- The real risks emerge when things go wrong. An inadequate liability cap, a defective termination clause or a misunderstanding of UAE law can expose a business to losses far exceeding the cost of specialist legal advice. The critical question is not whether AI can draft a contract, but whether that contract will protect your business when it matters most.
A contract is far more than a document to be drafted; it is a mechanism for allocating risk, defining obligations and protecting commercial interests when things go wrong. If those protections are missing or terms do not achieve their intended purpose, the resulting losses can far outweigh any legal fees thought to have been saved by using generative AI.
Businesses operating in the UAE must also consider how UAE law determines the meaning and effect of a contract, and who is legally permitted to provide legal consultancy services.
The new Civil Transactions Law, which entered into force on 1 June 2026, is particularly relevant to businesses using AI to draft or interpret contracts. This law governs important aspects of contractual relationships including how agreements are interpreted, how the parties’ common intention is determined and their conduct before entering into a contract. These considerations matter as the legal effect of a contract depends on more than the words on the page. An AI tool may generate a plausible interpretation or draft a clause that appears to reflect the parties' intentions, but that does not establish how the provision will be interpreted under UAE law or whether it will achieve the intended legal outcome.
In the UAE, Federal Decree-Law No. 34 of 2022, alongside additional professional registration and licensing requirements, regulates the legal profession and legal advisory process. This regulatory framework is designed to ensure that those providing legal advice are appropriately qualified and authorised to do so. AI, however, creates a potential grey area; it can generate legal wording, interpret contractual provisions and offer what appears to be legal advice, often without considering the wider commercial context, the specific circumstances of the parties or the applicable legal framework. Unlike a licensed legal professional, an AI tool does not itself hold a licence to practise law or provide legal consultancy services however the extent to which these regulatory requirements apply to AI-enabled services will depend on the nature of the service and how it is deployed.
The central concern is that businesses may be relying on AI-generated legal content without the benefit of the safeguards associated with regulated legal advice and while the regulatory position relating to the provision of that advice may not be clear.
The illusion of a contract that works
AI can produce convincing contractual language. It can also generate provisions that appear comprehensive, but they may fail to address the commercial realities of a particular transaction.
Consider a business engaging a technology provider to implement a new operational system. Using AI, the business prepares a services agreement containing implementation milestones, performance standards and a general obligation on the provider to deliver the services to an acceptable standard.
The system is delivered late and fails to perform as expected. The business discovers that the agreement does not establish sufficiently precise acceptance criteria, meaningful performance metrics or a clear process for requiring defects to be corrected. Nor does it adequately address the consequences of missed milestones or prolonged underperformance.
The business may have a contractual argument that the provider has failed to meet its obligations. However, proving a breach, having remedies available that actually matter, establishing the availability of those remedies and recovering the resulting losses may be considerably more difficult than anticipated.
The problem is not necessarily that AI drafted an obviously defective contract. It is that the agreement appeared complete, while insufficiently addressing the circumstances in which the business would need to rely on it.
The commercial value of a contract is measured not by how professional it looks, but by how effectively it protects the business when the relationship breaks down.
A specialist contract lawyer can identify the commercial outcomes that matter, translate them into appropriate contractual obligations and consider how those obligations would operate in practice.
Getting out of a contract may be harder than getting into one
AI can summarise termination provisions and suggest wording for termination rights. But a summary is not the same as advice on whether a business can lawfully terminate a particular agreement in particular circumstances.
Imagine a UAE-based company entering into a three-year outsourcing agreement. Several months later, the provider's performance deteriorates, service levels are repeatedly missed, and the company's customers begin to complain.
The company asks an AI tool whether it can terminate the agreement for poor performance. The tool identifies a provision allowing termination for material breach and suggests that repeated service failures may justify exercising that right.
What the answer may fail to establish is whether the contractual performance requirements have actually been breached, whether failures meet the relevant threshold, whether notice and cure periods apply and whether the company has complied with the contractual procedure for termination.
The agreement may also contain minimum commitment periods, early termination charges or provisions governing outstanding payments and transition assistance. If the company terminates prematurely or fails to follow the required procedure, it could expose itself to a claim for damages or other contractual consequences. It may also find itself without the services it needs to operate while having to source a replacement provider at short notice.
The correct approach when there is a contractual issue requires more than identifying a termination clause. It requires an understanding of the agreement as a whole, the factual circumstances of the issue and the applicable law.
The wrong allocation of liability can turn a manageable problem into a major loss
One of the most commercially significant functions of a contract is to determine who bears the consequences when something goes wrong.
AI-generated contracts may include exclusions of liability and indemnities, but the mere presence of these provisions does not guarantee that the allocation of risk is appropriate or effective.
Consider a business outsourcing the management of sensitive customer information to a third-party service provider. The agreement contains a general limitation of liability, but the business has not properly considered how that cap interacts with confidentiality breaches, data-related incidents, third-party claims, regulatory fines or other consequences, or the costs of investigating and responding to an incident.
A serious security breach occurs. The business faces investigation costs and potential adverse ramifications, operational disruption, customer complaints and potential claims. The provider argues that its liability is restricted by the contractual cap.
The business may now discover that its agreement does not provide the protection it assumed it had negotiated. Depending on the wording, applicable law and circumstances, what is capable of being recovered from the provider may be substantially less than the business's actual exposure and loss.
The opposite is also possible. Poorly drafted indemnities or unqualified liability obligations can expose a business to risks it did not intend to be responsible for.
Through interaction with the client and assessing the full contract in context, a contract lawyer can assess the relationship between the liability provisions, the commercial value of the contract, the nature of the potential losses and the parties' respective ability to manage those risks. The objective is not simply to make one party liable for everything. It is to allocate risk deliberately, with appropriate protections and a clear understanding of the consequences.
Can a business defend itself by saying it relied on AI?
This is a question that businesses should ask before assuming that AI-assisted contracting offers a cost effective ‘safety net’.
Suppose a business uses AI to draft an agreement or interpret a supplier's terms. The AI tool confidently advises that a particular clause allows the business to terminate the agreement without penalty. The business acts on that advice, only to discover that the clause does not have the meaning attributed to it.
Can the business defend its position by arguing that it relied on the AI tool in good faith?
There is no general exemption from contractual responsibility simply because a business relied on AI. The consequences will depend on the nature of the claim, the contractual terms, the applicable law and the relevant facts.
A defence to a claim is not the same as a remedy for having received poor advice. Even if a business has a potential claim against another party, that does not necessarily eliminate its obligations under the original contract or prevent the counterparty from pursuing its own remedies.
Consider a company that terminates a supplier agreement on the strength of an AI-generated interpretation. The supplier claims that the termination was wrongful and seeks damages. The company explains that it acted in good faith and followed the AI tool's advice.
That explanation may help describe why the company acted as it did, but it does not necessarily establish a defence to the supplier's claim. The company will still need to establish a legally recognised basis for its actions.
This is where the perceived cost saving in having used AI can become expensive. The business may end up paying for legal advice to assess the original agreement, the termination, the possible defences and any separate claim it might have against another party.
The prudent approach is to obtain legal advice before taking an irreversible step based on an AI-generated interpretation.
The new UAE Civil Transactions Law: whose intention counts?
Federal Decree-Law No. 25 of 2025 which promulgates the UAE Civil Transactions Law, provides an important additional dimension to the discussion. The new law addresses contractual interpretation, pre-contractual negotiations, good faith and disclosure. These provisions are particularly relevant to businesses that use AI to draft, negotiate or interpret agreements.
Where a contract is ambiguous and interpretation is required, the UAE Civil Transactions law allows for a deeper assessment of the parties’ intentions and will consider the significance of the parties' consent, the relationship between contractual wording and intention, commercial custom, good faith, and the surrounding factual circumstances at the time the contract was concluded.
What does this mean for AI-assisted contracting?
Imagine that two businesses negotiate a technology services agreement. During negotiations, their commercial representatives exchange emails explaining that the IT service must maintain a specified level of availability. An AI tool drafts the final agreement but omits to include the relevant performance commitment.
The contract is signed. Months later, the system repeatedly goes offline. One party argues that the agreement should be understood in light of the original commercial discussions; the other points to the written terms.
The dispute that ensues will require examination of the contractual wording but may then extend to an examination of the pre-contract emails or drafting margin comments to determine what the parties truly intended. The fact that AI drafted the agreement does not determine the parties' common intention. Nor does an AI-generated summary prove what either party intended or agreed.
AI cannot reliably establish the parties' legally relevant common intention simply by generating a plausible account of what they probably meant.
This has practical implications for businesses. AI may assist with summarising negotiations or comparing successive drafts, but it should not be treated as the definitive record of the parties' intentions. Original correspondence, agreed term sheets, MOUs, draft versions of the agreement, approval records and the final executed agreement may all be relevant to understanding what was negotiated and agreed.
The real cost of involving a lawyer too late
Perhaps the greatest misconception at present is that using AI first and then consulting a lawyer later, and only if a problem arises, will save money.
In practice, early legal input may be relatively straightforward: reviewing a proposed agreement, negotiating a problematic clause, identifying a missing protection or clarifying an obligation before the parties sign.
Once a dispute develops, the position can be very different.
The lawyer then instructed may need to reconstruct the negotiation history, examine correspondence, establish what the parties actually agreed, assess whether this is indeed reflected in the executed contract, whether a breach has actually occurred, evaluate the available remedies, and advise on potential proceedings. The business may simultaneously face operational disruption, urgent replacement costs, pressure from customers or other counterparties and brand damage.
Consider a company that uses AI to negotiate a supplier agreement without specialist review. It subsequently discovers that the contract has no effective mechanism for securing the timely handover of essential data and operational materials when the relationship ends.
The company now needs to negotiate an exit while the supplier controls resources necessary for the company’s business continuity. A provision that could potentially have been addressed before signature has become part of a much wider commercial problem.
Legal intervention at that stage may well still be essential and valuable, but it cannot restore rights that were never adequately secured or eliminate the costs and losses already suffered.
The distinction is simple: early legal advice helps a business decide which risks to accept; late legal advice may be needed to manage risks the business has already accepted without fully understanding them.
Using AI intelligently without outsourcing legal judgment
None of this means businesses should avoid using AI. Used appropriately, AI can be a valuable tool for improving efficiency, organising information and supporting preliminary contract analysis.
Used well, AI can help identify provisions requiring attention, produce an initial summary of contractual obligations or generate questions for a lawyer to investigate. These uses can make legal review more focused and cost-effective for businesses.
The difficulty arises when AI-generated material is treated as a substitute for professional judgment.
Businesses should therefore establish clear rules governing which AI tools may be used, what information may be uploaded, who is authorised to rely on AI-generated analysis and when legal review is mandatory.
AI-assisted contract management should complement sound governance, not replace it.
Businesses should consider obtaining specialist legal advice before signing material agreements, adopting unfamiliar contractual terms, accepting significant liability, relying on termination rights or responding to a serious breach. Particular care is warranted where contracts involve sensitive data, substantial financial exposure, complex service obligations or cross-border arrangements.
AI-generated analysis should be checked against the original agreement. Businesses need to understand and verify the assumptions AI has made which underly its conclusions, verify important contractual deadlines and ensure that sensitive information is handled appropriately.
They should also retain a clear record of contractual negotiations, material amendments, approvals and final agreed terms. This can help show what was proposed, what was accepted and how the parties ultimately arrived at their agreement.
Above all, contracts should be reviewed in their true commercial and legal context. What is the right provision for one transaction, may be inappropriate for another, even where the agreements appear similar.
Conclusion: The machine does not take the risk
AI is becoming an increasingly useful part of the contracting process. But it does not remove the need for businesses to understand the obligations they undertake, the protections they secure or the consequences of contractual failure.
When an AI tool produces an inadequate clause, misunderstands a termination right or overlooks a jurisdiction-specific issue, the commercial consequences do not disappear simply because the business relied on the technology.
There is no general defence based solely on having followed AI-generated advice. The UAE's new Civil Transactions Law provides a framework for interpreting contracts and assessing pre-contractual conduct, but it does not make an AI tool the authoritative interpreter of the parties' intentions. Meanwhile, the UAE's regulation of legal consultancy services means that businesses offering legal advice to others should consider whether their activities require professional authorisation.
The sensible approach for businesses is not to choose between AI and lawyers. It is to use AI as a tool within a properly managed process, with specialist legal advice providing the judgment, context and jurisdiction-specific expertise that the technology cannot reliably guarantee.
Before signing a contract, it is worth asking a more important question than whether AI can draft it: will this agreement protect the business when the relationship does not go to plan?
That is where experienced contract lawyers add value; not merely by producing legal wording, but by identifying risks, negotiating appropriate protections and helping businesses make informed commercial decisions before those risks become costly disputes. Specialist legal review can help ensure that contractual arrangements reflect the transaction, the parties' commercial objectives and the applicable legal framework.
If you require specialist commercial contract review, interpretation or support in managing contractual risks in the UAE, Shonagh MacVicar, Senior Counsel, Commercial (s.macvicar@hadefpartners.com) has over 25 years of commercial contract specialism including practical operational experience of working and advising from within UAE businesses.
This article is intended for general informational purposes only and does not constitute legal advice. Readers should seek independent legal counsel in relation to their specific circumstances.