Author: Jayita Sharma
Institution: The Law School, University of Jammu (1st Year, 2nd Sem)
Designation: BALLB Student
Current Position: Legal Intern, LawVaani
Opening the Case File: When AI Starts Drafting Contracts
That was the case of a promising technology startup that signed a big service contract after all the pieces fell into place․ The founder decided to use an artificial intelligence tool to write the first draft to save time and legal fees․ The parties then negotiated a few amendments to the text‚ and agreed to electronically sign the contract‚ thereby commencing the relationship․
A few months later‚ one of the clauses in the contract became an issue as it imposed a liability neither party intended to assume‚ each side claiming that the AI program had inserted the clause (with neither side having read it before it was entered into force)․ Initially thought to be a simple matter‚ the issue became a point of contention between the parties․
The scenario of the ChatGPT contract example is no longer hypothetical as it is increasingly common to draft commercial contracts‚ employment contracts‚ tenancy contracts‚ and other legal documents using artificial intelligence tools‚ such as ChatGPT‚ Gemini and Claude‚ which raises the issue of their legal effect․ Companies‚ freelancers‚ startups and individuals have begun to use AI technology to draft contracts‚ which previously required time‚ expertise and money to accomplish‚ in a matter of minutes․
The growing dependence on artificial intelligence brings forth several important legal questions. For instance, under Indian law, can a contract developed with the help of artificial intelligence still satisfy validity requirements? Is it possible for a party to avoid liability by asserting that a mistaken clause was created by AI? In cases where an AI-generated contract has inaccuracies, who is responsible: the user, the software developer, or the AI platform? Moreover, will Indian courts uphold these agreements with the same rigour as traditionally drafted contracts? This article delves into these topics by examining relevant aspects of the Indian Contract Act, 1872, the Information Technology Act, 2000, the Bharatiya Sakshya Adhiniyam, 2023, and the legal challenges posed by AI-assisted contracting. Through practical case studies, it evaluates how established legal principles apply to AI-generated contracts and reflects on whether India’s current legal framework is sufficiently robust to meet the demands of artificial intelligence in contractual relationships.
Understanding the Technology Behind the Deal: What Exactly Are AI-Generated Contracts?
Artificial intelligence has accelerated the drafting of legal documents‚ reducing the time needed to draft‚ review, and revise them from hours to minutes using tools such as ChatGPT‚ Gemini‚ Claude, or other legal technology software․ Contracts can account for a large share of the documents created using these drafting tools․
An AI-generated contract is a contract drafted‚ reviewed or negotiated via an artificial intelligence-enabled contract generation tool or service․ The user instructs the contract generation tool or service‚ instead of drafting every provision in the contract manually‚ through input text and/or clicks to create the contract for a specific context and/or purpose․ However‚ the impact of AI is likely to depend on how the technology is used․
Despite these noteworthy advantages, it is essential to acknowledge that AI cannot replace the intricate judgment and expertise that human legal professionals offer. AI systems do not possess an independent legal identity, nor can they comprehend commercial intentions or assess the unique circumstances surrounding each transaction.
The Legal Framework: Can Existing Laws Handle AI Contracts?
To understand the legal implications of AI-generated contracts, it’s important to assess whether India’s current legal framework can accommodate them. While there isn’t a specific statute for AI-drafted contracts, this doesn’t mean they’re outside the law’s purview. Their validity relies on established contract law principles and regulations governing electronic transactions. In essence, Indian law focuses not on the method of drafting but on whether the agreement fulfils the criteria of a valid contract.
The Indian Contract Act, 1872
Indian Contract Act 1872 is an Indian legislation governing the law relating to contracts, and the intention is to regulate the formation‚ performance, and enforceability of contracts irrespective of their form or the manner in which they are expressed․
The Indian Contract Act 1872 defines in section 2(h) that “an agreement enforceable by law” is called a contract․ Thus‚ a mere generation of a document by a platform like AI cannot be treated as a legally binding contract․ However, this document is only binding in every case where it complies with the statutory provisions of the Act․.
These principles are represented in Section 10 of the Indian Contract Act․ According to that section‚ an agreement shall be lawful and enforceable in the eyes of law‚ if (1) the parties are skilled to contract, (2) there is free consent, (3) there is a lawful consideration, (4) there is a lawful object, (5) the agreement is not declared void․ These conditions can be relevant when a contract is drafted with the help of artificial intelligence․
Consent is one of the essential elements of a valid contract‚ and a contract may be said to be void or voidable if the consent was obtained under coercion‚ undue influence‚ fraud‚ misrepresentation, or mistake․ In particular‚ the use of artificial intelligence does not relieve the parties of their obligation to independently review‚ understand, and accept the terms of the contract for it to be effective․
Similarly‚ competency of parties continues to be indispensable․ Under Indian law‚ only persons skilled to contract can enter into legal agreements․ AI systems cannot be identified as having legal capacity‚ intention or personhood‚ meaning AI cannot become a side to a contract‚ give valid consent or perform contractual obligations․ AI is still considered a tool to be used by its human operators․ It does not create a legal relationship between the parties‚ which remains purely human․
In addition‚ the parties under the Act must provide lawful consideration and a lawful object; this is true whether the agreement is handwritten or produced by artificial intelligence․ The object of the agreement must not be unlawful‚ fraudulent‚ immoral‚ or contrary to public policy․ Even if AI generated the language‚ AI cannot validate an otherwise unlawful transaction․
The need for agreement to be evidenced by a valid offer‚ acceptance and intention to create legal relations has also been recognized in case law․ In Carlill v․ Carbolic Smoke Ball Co․ (1893)‚ the court held that a promise was binding if the essential ingredients of contract formation could be satisfied․ Although the dispute did not concern artificial intelligence‚ the decision illustrates that whether a contract is enforceable is a matter of the parties’ conduct and intent‚ rather than the style in which it is drafted․
As in Lalman Shukla v․ Gauri Dutt (1913)‚ where there is to be a contract‚ one must have knowledge of the offer and one must accept․ Thus‚ in AI-assisted contracts‚ where parties merely rely upon terms generated automatically‚ which they have not understood or accepted‚ it may prove problematic to establish true consent to contract․
The Information Technology Act, 2000
The Indian Contract Act determines whether a contract is legally enforceable, whereas the Information Technology Act‚ 2000, determines whether a contract can be made and performed electronically․
By virtue of Section 10A‚ the law recognizes that a contract made between parties by electronic communication and does not make a contract unenforceable simply because the offer‚ acceptance or communication is made by electronic means․ Because businesses now regularly negotiate and conclude contracts using emails‚ websites and other electronic forms of communication‚ the section has become increasingly important as it now also covers the use of AI software‚ which would also not in and of itself affect the validity of the contract․
Electronic records are also recognised in Section 4․ Any contract that is stored electronically or is communicated via email or other electronic means may‚ in the absence of any explicit law‚ be as valid as a paper-based contract‚ if all other requirements are met․
Section 5 further gives legal effect to electronic signatures‚ enabling parties to an agreement to the extent that electronic signatures‚ when employed by parties using one of the government-approved systems‚ bind parties in the same manner as handwritten signatures․ This has helped digital commerce and electronic contracts in India․
Even more importantly‚ these acts show that Indian law is already keeping in step with the reality of the digital world․ The Information Technology Act does not explicitly regulate artificial intelligence but lays the foundation for recognising electronic agreements․ Hence‚ it does not matter whether a contract was drafted manually‚ or with the help of AI‚ as long as the essentials required under the Indian Contract Act have been met․
Case File No. 1: Can ChatGPT Draft a Legally Valid Contract?
For example‚ a startup founder could create a service agreement with a new client by asking ChatGPT to write a highly professional service contract in minutes‚ after which the client and the startup could sign it electronically after making a few modifications․ A few months later‚ the two sides get into a dispute over one of the clauses‚ and one side claims the contract should not be enforced because it was drafted by an AI program and not a lawyer․
As mentioned earlier‚ a contract is to be based upon skilled parties‚ free consent‚ lawful consideration‚ and lawful object (Section 10 of the Indian Contract Act‚ 1872)․ It is not necessary that a contract be written by an advocate and it is also not necessary that it be written by hand․ Thus‚ the mere presence of an AI tool‚ however‚ could not vitiate the legality of the agreement․
The role of intention within contract formation was examined in Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co. (1966). The Supreme Court reviewed contract formation principles regarding communication between the parties. The case illustrates that for a contract to be legally enforceable, a complete offer and acceptance are necessary, irrespective of whether the offer was written, typed, or formulated with the assistance of technology.
Conceivably, a contract produced with some technology is not invalid, provided that it meets the essential elements of the Indian Contract Act and expresses the intention of the contracting parties. Even if the system of technology produced the document, the system of law still views the contract as a result of the agreement of the parties concerned and of their free will.
Case File No. 2: When AI Inserts the Wrong Clause
A manufacturing company chooses to implement an AI drafting tool to draft a supply agreement with a long-standing business partner. When the tool drafts the agreement, the AI adds an indemnity clause stating the buyer will be responsible for all losses related to the transaction, even if the losses are due to the supplier’s negligence. The supplier and the buyer both sign the agreement, assuming there are no errors in the document. Months later, the supplier, having suffered a loss, initiates a compensation claim based on the indemnity clause.
What can the contracting parties do in this case? Should they claim they are not liable because the clause in question was drafted by an AI tool? At this point, it seems reasonable to expect that responsibility would be passed to the AI tool that drafted the clause. In reality, this leads to a more important question: can AI bear any form of legal responsibility?
Considering the current legal framework in India, the response cannot be anything but no. AI systems are not legal entities; they cannot hold any legal rights or legal obligations. AI will not be able to participate or be liable for a contract because it lacks the necessary independent will and legal capacity. AI serves only as a tool that, when given data and instructions, will produce responses.
This brings us to the principle of attribution. Attribution deals with distributing responsibility and error recognition. With respect to AI-generated contracts, while the drafting may be automated, the generated document’s use is still decided by a human. The person selects the AI, issues commands, assesses the draft, and finally, makes decisions regarding the signing of the contract. The contract’s legal implications are attributed to the signatories and not to the technology.
Although AI can facilitate the rapid and efficient creation of contract documents, it cannot absolve individuals of their accountability. Currently, Indian law views artificial intelligence as an advanced tool for drafting rather than an autonomous legal entity. Ultimately, the responsibility for reviewing contract terms and accepting the associated legal implications lies with the individuals or organisations that opt to rely on this technology.
Case File No. 3: “I Signed Without Reading” — Can I Escape Liability?
A freelance graphic designer uses an AI service to create a contract for a new client. After the service is provided with information, the AI designs a contract that lays out the structure for payment terms, confidentiality, copyright, and a clause for dispute resolution. The freelance designer is confident in the accuracy of the contract and signs without reading it, and the client also signs without reading. After some months, a dispute about the rights to the creative work arises. The freelance designer learns that the contract gives the client the rights to all of the intellectual property. The freelance designer and the client were not aware of this during their discussions of the contract. The freelance designer argues that the contract should not be enforced, since the clause was generated by AI and was accepted without proper review. This brings an interesting legal question: Can a party avoid a contract if the party did not read the clause generated by AI and signed the contract? This can be answered by referring to the Indian Contract Act, 1872, where Section 10 states that to create a contract, the parties must enter into the contract of their own free will. It was not done by any of the legal causes for lack of capacity to contract. Therefore, in the absence of any of the legal causes which effectively restrain the capacity to contract, the contract remains legally valid.
The principles discussed above apply equally to all the instances of increasing use of AI. Drafting may be an AI function, but the parties themselves may make the decision whether or not to rely on it and to proceed with the agreement. Contract law has long held that those who enter into legally binding contracts have a responsibility to review the contract and to exercise care. AI contracts will not be an exception to this principle.
This is the principle of the duty to read. Indian contract law does not have any specific statutory duty requiring a party to read every clause of a contract. Thus, artificial intelligence, while possibly changing the process, still places a responsibility on the contracting parties to know the terms of the agreement. Drafting agreements through the aid of AI simplifies the decision-making process; however, the need for informed decisions still exists.
Case File No. 4: When an AI-Drafted Contract Reaches Court
A company may use an AI platform to draft commercial agreements, email the final document, and execute the commercial agreement using electronic signatures. After a contract dispute arises months later, one of the parties may argue that the contract is unenforceable because it was drafted using AI. This raises a potential issue. Would Indian courts uphold an AI-drafted contract?
While Indian law does not specifically provide for contracts created by AI, existing legal frameworks could provide guidance. As discussed previously, the enforceability of a contract is determined by the Indian Contract Act of 1872. This is unlike the technology used to construct the contract. Hence, Courts are more inclined to determine if the parties intended to establish a legally binding relationship, not if the parties used AI to draft the contract.
This was the approach in Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co. (1966), where the Supreme Court held that a valid offer and acceptance create a contract. This judgment declares that the intention and conduct of the parties determine if the contract is enforceable, and not the medium through which the contract is prepared.
This same approach was adopted in the case of Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. (2010), where the Supreme Court held that a binding agreement is formed through electronic communications, should the elements of contract formation be present. This approach is further supported by Section 10A of the Information Technology Act, 2000, where contracts formed through electronic means are legally recognised.
Should a court dispute such a contract, the subsequent question will focus on proving the contract as evidence. The Bharatiya Sakshya Adhiniyam, 2023, acknowledges the inclusion of electronic records as evidence, including emails and documents with electronic signatures, provided the stipulations of the law have been fulfilled. Shafhi Mohammad v. State of Himachal Pradesh (2018) and Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal (2020) showcased the necessity of proving electronic evidence before it can be admitted as evidence in court.
The fact that contracts may now be drafted with the assistance of AI will not likely affect the enforceability of contracts. Indian courts will most likely rely upon the age-old doctrines of contract law while accommodating the new methods of contracting. The enforceability of a contract, which may have been drafted by AI, will, in the end, depend on the intention of the parties and the validity of the contract, and not the drafting tool.
Looking Ahead: Risks, Reforms and Responsible Use of AI
The proliferation of artificial intelligence in contract creation has prompted the formulation of responses in relation to the deployment of AI in various jurisdictions. As an example, digital contracts have received longstanding formal recognition in the U.S., and cases including Specht v. Netscape Communications Corp. reinforce the need for informed consent in digital contracts. On the other hand, the EU has introduced a legal framework for the development and use of AI with the AI Act, and the Law Commission in the UK has provided that AI-supported transactions would mostly fit within the existing framework of contract law, with some revision needed. Compared with these jurisdictions, India currently has no dedicated legal framework for contracts created by AI, and relies on the traditional principles of contract law and of information technology, with no dedicated legal frameworks for AI.
Owing to the recent developments in the integration of AI in the business framework, India is in need of affirmative legal changes. While the Indian Contract Act of 1872 and the Information Technology Act of 2000 provide a mostly adequate legal framework, these laws do not address the attribution of acts undertaken by AI, liability for errors undertaken by AI, or the provision of adequate safeguards and transparent oversight. Given the rapid integration of AI in commerce, a more specialised legal framework for the responsible use of AI may be needed.
In the interim, reliance on AI to create legal documentation requires due caution. Legal contracts require that all provisions be carefully reviewed, contemporaneous legal signatures be affixed, and that all drafts, correspondence, and communications be retained. Businesses need to be especially careful not to upload data that is confidential or commercially sensitive to public AI platforms, even with safeguards in place.
One of the biggest dangers to blind faith in AI is fake confidence. One should never believe that AI-created contract clauses are legally sound, that AI is capable of assuming liability to breach a contract, or that contract clauses created in AI will meet the legal test of evidence. Even though AI can support the drafting of contracts, it cannot and should not be relied upon to support legal advice or judgment.
AI has helped users to draft contracts more rapidly, but it has not changed the way contracts work with respect to the law. For the time being, until India establishes a dedicated law for AI, consent, liability, and accountability will continue to govern contracts created by AI. While contracts may be created by the AI, the law will never allow a contract to be unmade by the will of the people.
Know Your Rights: Frequently Asked Questions
Is a contract drafted by ChatGPT legally valid?
Yes, contracts created by AI can be legally valid if they meet essential requirements like mutual consent and clarity of terms. However, it’s important to ensure compliance with applicable laws.
Can AI become a contracting party?
No, AI cannot be a legal contracting party. Contracts must involve human or recognised legal entities. AI can assist in drafting, but doesn’t hold legal rights or responsibilities.
Can I sue AI for mistakes?
Suing AI directly is not feasible since it lacks legal personhood. Responsibility falls on the individuals or organisations that operate the AI.
Are electronic signatures legally recognised?
Yes, electronic signatures are legally recognised in many jurisdictions and hold the same weight as handwritten signatures, provided they meet certain conditions.
Can AI-generated contracts be used as evidence?
Yes, AI-generated contracts can serve as evidence if they satisfy legal documentation standards, including proper signing and clear terms. Maintaining records of their creation enhances credibility.
Sources and Authorities
Statutes
- Bharatiya Sakshya Adhiniyam, 2023.
- Digital Personal Data Protection Act, 2023.
- Indian Contract Act, 1872.
- Information Technology Act, 2000.
Cases
- Arjun Panditrao Khotkar v Kailash Kushanrao Gorantyal (2020) 7 SCC 1.
- Bhagwandas Goverdhandas Kedia v Girdharilal Parshottamdas & Co AIR 1966 SC 543.
- Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
- Felthouse v Bindley (1862) EWHC CP J35.
- Lalman Shukla v Gauri Dutt (1913) ILR 35 All 489.
- Shafhi Mohammad v State of Himachal Pradesh (2018) 2 SCC 801.
- Specht v Netscape Communications Corp 306 F 3d 17 (2d Cir 2002).
- Trimex International FZE Ltd v Vedanta Aluminium Ltd (2010) 3 SCC 1.
Reports & Policy Documents
- NITI Aayog, National Strategy for Artificial Intelligence #AIForAll (2018).
- OECD, OECD Principles on Artificial Intelligence (2019).
- UNESCO, Recommendation on the Ethics of Artificial Intelligence (2021)
