The AI wave has finally made its way onto the shores of contracts and agreements.

We all saw this one coming.

Businesses, startups, and entrepreneurs now use contract AI solutions for creating, drafting, and reviewing agreements.

But contract AI is more than just another overused buzzword.

It is a technological concept that refers to the use of machine learning and natural language algorithms to generate contract clauses and whole agreements.

This eliminates the tedious, headache-inducing task of drafting legal documents from scratch.

In this article, we’ll explore the contract AI concept and understand how these contract processes are changing the way people and businesses approach agreements.

Let’s start from the very top.

Key takeaways

  • Contract AI makes it possible to generate contracts with the help of artificial intelligence and machine learning.
  • You can create AI contracts from scratch using case-specific prompts, or you can work with any available template.
  • Contract AI requires human supervision, because the technology is still prone to errors and expensive blunders.
  • Enterprises, small businesses, startups, and solopreneurs can save money and improve productivity by using AI solutions to streamline the contract creation process.

What is contract AI?

Contract AI is a technological concept that involves the use of machine learning and artificial intelligence to generate clauses or an entire contract.

This technology uses natural language processing algorithms — such as the famous GPT-4 — to draft and review the contents of any written agreement.

This reduces the drafting time frame for any agreement.

How does contract AI work?

Without going into the technical details about algorithms and datasets, here is a quick breakdown of how contract AI solutions work.

We’ll use a fictitious example: A lease needs to be drafted on your behalf with MarsWay Properties, a California real estate company, and you have no clue how to start.

The first thing to do is create a search prompt containing the main details, purpose, and intent of the agreement.

Here is an example prompt:

I want to create a lease with a real estate company called MarsWay Properties. The company is based in California. The purpose of the lease is to acquire a space on the plaza at [insert address]. Can you help me draft a contract?

The AI contract generator will now analyze this prompt to generate a draft for you.

With this draft, you can now make edits and add other key details to your important contract.

Similarly, if you have templates and you need to add or edit clauses to suit specific terms of cooperation with MarsWay Properties, you can use AI tools to generate context-relevant clauses.

Once the draft passes the review process, you can make adjustments using Microsoft Word or other text-based editors and send it to MarsWay Properties.

Types of AI contract software

AI contract software varies in terms of functionality.

Some are used for drafting, while others serve multiple purposes at once. Here are the various types of AI-based contract software.

  • Contract drafting software for generating clauses via detailed prompts. Tools such as Panda AI are virtual assistants for fine-tuning and fleshing out your raw ideas.
  • Contract review tools for going through the contract’s wording to ensure it aligns with your needs and initial stipulations.
  • Contract data extraction software for identifying, retrieving and/or flagging essential bits of information in the contract. Tools like Document AI are important for extracting contract intelligence for negations and renewals because they highlight key points and red flags.

A contract lifecycle management (CLM) software like PandaDoc combines all these functionalities into one package.

This solution provides a contract repository that helps users to author, analyze, summarize, review, and store agreements.

Benefits of using AI for contracts

Companies are now flocking to AI-generated contracts because they make work easier and more productive.

Here are the main benefits of using contract AI.

Benefits of using AI for contracts

Streamline the contract creation process

AI contract solutions increase the speed of delivery by reducing the time it takes an assistant, business analyst, paralegal, or solopreneur to draft an agreement.

These advanced algorithms can scour through mountains of data within seconds to populate and deliver an almost-ready template.

You’ll just need to make a few edits before gathering all the needed approvals.

Increase the accuracy of insights

Using AI to analyze contracts makes it possible to extract data points from written agreements faster and more accurately.

First, the OCR (optical character recognition) technology goes through every page.

Then the AI analyzes every important field to decode and summarize the contents.

Help businesses save on costs

AI-generated contracts will save you money by eliminating the need to outsource legal operations and procurement.

That’s not to say you don’t need lawyers or legal teams; rather, you just have fewer billable hours since the AI has done the bulk of the work for you.

Also, small businesses and startups can use contract AI solutions to draft agreements for cooperation with service providers and for other administrative purposes.

Improves employee morale and productivity

Automating contract generation with AI will help your employees focus on other administrative and business-related tasks.

In general, AI content generation is a major step toward digital transformation.

Instead of spending time on repetitive tasks such as drafting agreements for every use case, they can use AI contract generators to automate workflows.

Challenges of AI-generated contracts

Although AI-generated agreements have several benefits, they are not without their own set of risks. Let’s go through them in detail.

Compliance and enforceability concerns

Local and federal laws are still all over the place regarding AI-generated content.

In some countries, any trace of AI use in your contract will nullify it.

Besides, using AI to generate contracts might be tricky in regulated industries like finance and healthcare.

This is a crucial privacy issue for companies that need to create written agreements that require feeding user data into a shared database — failure to adequately safeguard and anonymize exploitable client details poses serious privacy concerns.

Third-party risks

Speaking of feeding data into AI for contract analysis, some companies are skeptical about using AI solutions because it gives third parties access to their data.

For example, Samsung has banned employees from using ChatGPT and other unauthorized AI solutions. This company-wide ban comes on the heels of a security breach resulting from indiscriminate AI use.

Data accuracy and bias

Contract AI tries to be neutral, but the technology has an inherent bias. Why?

Well, AI algorithms use contract intelligence to gather data from a vast repository of sources.

Since the content comes from humans, the author’s bias can creep into the terms of the agreement.

In some cases, the language model could start hallucinating — making things up on the fly as opposed to providing factual data.

One example that comes to mind is the case of lawyer Stephen Schwartz, who used ChatGPT to prepare case files.

As it turned out, the AI generated fake citations and referred to the wrong or flat-out nonexistent cases.

Dispelling myths about contract AI

As a relatively new technology, contract AI — and AI in general — has become the subject of several myths.

Some of them are true; others sound like poorly-written fiction.

Let’s dispel those contract AI myths.

Myth 1. Contract AI will replace lawyers

While AI contract management software can eliminate human error and increase the efficiency of handling agreements, this technology will not be replacing lawyers anytime soon.

If AI can’t cite the correct cases, trusting it to generate agreements unsupervised for high-value business deals might be a stretch.

Myth 2. AI is hard to implement for contracts

This misconception actually makes sense because generative AI sounds like something from the Star Wars universe.

In reality, AI for contracts works like a glorified Google search but without the stress.

With ChatGPT and similar tools, you can generate a basic agreement within seconds.

Tools like Panda AI can also provide contextual suggestions within the doc — no coding needed.

Myth 3. AI needs experts for its application

This myth is partially true.

On the one hand, you need experts to go through the AI-generated contract to make sure every detail is correct.

On the other hand, most solutions for AI agreements are plug-and-play technology, meaning anybody can use them regardless of tech expertise.

Myth 4. AI contracts are free of errors and mistakes

This one is completely false. Remember the embarrassing case of the lawyer using ChatGPT mentioned earlier?

If you want to preserve your business reputation, you need to go through every line with the meticulousness of a Swiss watchmaker.

Myth 5. Contracts created with AI close more deals

There is absolutely no guarantee that drafting your agreement with AI tools will help you close more deals.

The AI doesn’t have a secret recipe for successful deals; successful negotiation still has to fall at your feet.

Best practices for navigating AI contracts

Contract creation will be the next component of the AI monster wave.

But this is not a bad thing. Here are the best practices to make AI contract creation work for your business.

Best practices for navigating AI contracts

Learn how the technology works

Playing around with AI tools gives you a better POV on how they process requests and respond to prompts.

Businesses should encourage their employees to work with AI contract software.

Make your prompts as detailed as possible

Knowing how the technology works will tell you that the more detailed your prompts, the better your results.

So add as much information as possible and tailor it to the specific tone and business requirement.

Know the risks

Companies should constantly assess the risk of introducing AI contract software into the workflow.

Some key considerations include data privacy, compliance, and safety.

Always review the output

Whether you are drafting a contract for a merger or lease, you always need to review the AI-generated agreement details.

Doing your due diligence will save you a lot of headaches and potential lawsuits.

Automate redundant tasks

Use AI solutions to work on drafts and extract vital contract data and contract analytics in order to save time and hasten the negotiation process.

Use AI to draft, sign, and manage contracts

Contract AI is the shiny new toy that businesses are using to automate and improve contract management.

But while this technology might improve workflow efficiency and save costs, it also introduces security and compliance risks.

With a tool like PandaDoc, you will get access to contract management tools that cover every stage of the lifecycle.

You can also rely on PandaAI to generate clauses for your contracts while working with the doc.

Want to use PandaDoc to draft, edit, negotiate, and sign agreements? Sign up for a free trial right away.

Frequently asked questions

  • Yes, contract AI is legally binding, just like any other agreement. You can use this technology to create agreements for business and personal use, provided the terms of the agreement are valid and fair. Regardless, you must confirm whether AI-generated contracts are legally binding in your industry or geographical location.

  • To create contracts using AI, you need to come up with a descriptive prompt. Alternatively, you can load templates and ask the AI solution to adapt them to your specific use cases. After that, review the output and make changes where necessary.

  • Yes, contract AI can be a dangerous tool when used carelessly. You still need to enforce guardrails and guidelines when using management solutions to ensure your data doesn’t fall into the wrong hands.

  • PandaDoc users can use the Panda AI assistant for free if they have an ongoing subscription. You can also use the AI assistant to redline, draft, renew, and sign agreements.


PandDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDocs services are governed by our Terms of Use and Privacy Policy.