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The legal profession’s attention has largely been focused on AI’s courtroom mistakes, from hallucinated case law to fictitious citations. But according to one partner at an award-winning boutique firm, the greater risk may be hiding in the contracts businesses are signing every day.
Speaking on a recent episode of The Lawyers Weekly Show, Aabid Farouk, partner of Hazelbrook Legal, warned that the rapid rise of AI-drafted contracts is creating a new legal minefield, forcing lawyers and law firms to navigate risks many clients may not even realise exist.
The legal profession may be preoccupied with AI’s courtroom hallucinations, but Farouk warned that a quieter yet potentially more damaging risk is emerging in the corporate and commercial space, with the ability to expose businesses and law firms to significant legal and commercial consequences.
“What we’re seeing is that there’s a lot of commentary and media around AI hallucinating, especially in the disputes and litigation arena, false or incorrect citations in pleadings in court,” he said.
“But so as a transactional lawyer, we’re also seeing a lot of it in corporate commercial documents.”
While acknowledging AI’s ability to produce well-drafted contracts and strong clauses, he stressed that it often falls short in appreciating the nuances that underpin commercial transactions.
“Everyone knows that AI can produce and draft contracts, very good contracts, very good clauses,” he said.
“But what it often can’t do is provide legal judgment, and understand the broader commercial context, assist with negotiations and with strategy.”
Farouk shared that, as a result, lawyers are increasingly being confronted with documents that appear professionally drafted on the surface, but beneath the polish contain provisions that expose clients to unnecessary legal and commercial risk.
“We’re seeing, especially in sort of corporate commercial documents, some issues arising whereby clients will run something through AI, get AI to produce a document, and oftentimes they won’t tell you AI has produced it,” he said.
“But you get it and it’s clearly the case because there are clauses in there that put them in a bad position commercially and legally. There are certain things that they haven’t considered.”
But with so many concerns emerging, why are clients turning to generative AI platforms to produce draft documents in the first place?
He revealed that a key driver behind the trend is the perception that AI can reduce legal spend by minimising the need for extensive drafting support, while also offering significant gains in speed.
“We can only sort of hypothesise because the clients don’t tell us or we haven’t asked the questions,” he said.
“But I think some of the reasons are firstly, they may think it’s pretty straightforward, and in order to save sort of time and costs, they run it through AI, thinking that, you know, that’s going to save them in legal fees.”
While AI’s use across legal and commercial work is now unavoidable, Farouk said the real priority for legal leaders is to put “guardrails” in place and “[ensure] clients are properly educated” about its risks.
