ChatGPT and Legal Contracts: What Every Small Business Owner Needs to Know

ChatGPT is the latest, revolutionary artificial intelligence technology that is shaking up the market. Business owners are utilizing this AI tool to instantly generate high quality content, blog posts, campaigns, and much more.

It’s no wonder that the legal and business world is abuzz with the question 'Can ChatGPT write legally binding contracts?’ Read on to find out the best solution for your business.

Questions of Small Business Owners About Using ChatGPT to Create Legal Contracts

Let's unpack the questions small business owners have about using ChatGPT for legal contract generation:

1. Legal Validity - Are ChatGPT's contracts legally binding and valid?  ChatGPT creates legal contracts based on the text data it has been trained on. It is worth evaluating whether the contract terms generated by ChatGPT are valid for the purpose in question. This is particularly true when it is used to create a legally binding relationship that will have repercussions if declared invalid by courts.

2. Accuracy - The ChatGPT response accuracy depends on the prompt provided by the user. As the user and ChatGPT lack the technical experience to assess quality of the prompt vis-a-vis the actual requirement of the user, it is important to ascertain whether the ChatGPT generated contracts are accurate?

3. Complexity: Can ChatGPT generate complex contracts? Small business contracts can range from simple to complex. It needs to be assessed whether contracts with specific requirements or high levels of complexity can be generated by ChatGPT.

4. Cost: Another factor to consider is the cost of using ChatGPT compared with hiring a lawyer. While the cost of using ChatGPT is significantly lower than hiring a lawyer to create contracts, what are risks of solely relying on ChatGPT for your legal contracts? 

5. Customization: Can ChatGPT customize the existing contracts by incorporating the specific requirements of the parties? Small businesses will be able to cut down on lawyer costs by using ChatGPT to make a minor modification to the contracts.

6. Limitation: ChatGPT is the first AI-based language model. Are there any limitations or restrictions that a business owner needs to consider before using a language model lacking any professional experience to create business contracts?

Can ChatGPT write contracts? Let’s experiment with the capabilities of ChatGPT

ChatGPT can be seen as a great tool for legal services by small business owners with limited budgets. Just give a prompt to generate a service agreement and there is a template created for you within minutes. But the question is - who is going to fact check it? This is clearly outside the skill set of an entrepreneur. 

Example 1 - Photograph License Agreement

I asked ChatGPT to write a photograph license agreement and the result (see Appendix A below) was an agreement with generic boilerplate provisions but the specific provisions for ‘Grant of License’, ‘Conditions of Use’ were missing! In fact the ChatGPT generated a template more appropriate for a  Photography Service Agreement while the prompt was ‘Write a Photography License Agreement’. 

At DocPro, our lawyers have drafted three versions of the Photograph License agreement i.e. in favor of Client, Photographer and Neutral form, which gives a DocPro member the flexibility to choose a template depending on their requirements.

Example 2 - Confidentiality Agreement

Complex agreements like Settlement Agreements, Prenuptial Agreements, Divorce agreements, Confidentiality, IP Licensing Agreements are even more tough for ChatGPT to generate as the terms and conditions of such contracts vary from case to case basis. 

We have asked ChatGPT to draft a relatively simple confidentiality agreement (see Appendix A below), terms and conditions vary depending on the nature of confidential information and parties involved. 

On the earlier versions, ChatGPT actually declined to draft or provide legal documents such as a confidentiality agreement and suggested that we consult a licensed attorney in the relevant jurisdiction. Now it does produce a draft, but it is still subject to a disclaimer that given the nature of the agreement, it will be difficult to rely on a generic ChatGPT template without taking into the specific circumstances of the agreement. 

Chat GPT says:

While at DocPro, we understand the requirement to have templates to cover different scenarios. For instance, for confidentiality agreement, DocPro has more than 10 different forms of confidentiality agreement templates depending on the nature of confidential information exchanged between the parties.

Are ChatGPT contracts valid?

ChatGPT says:

Here are my ChatGPT experiment takeaways:

1. Lacks Technical Expertise -  Contract drafting requires understanding of all applicable laws, regulations and specific circumstances.  ChatGPT’s lack of expertise in law affects its ability to write contracts that need to be compliant with specific laws and regulations.While ChatGPT can cut time and save cost in many cases, it can’t replace the expertise of a lawyer writing contracts that protects the business owner in a transaction. Since ChatGPT is not licensed to practise law, any contract drafted by ChatGPT could be considered a self-drafted agreement, says Nishith Desai, founding partner of Nishith Desai Associates.

2. Prompt Accuracy- ChatGPT response is highly dependent on the quality  and accuracy of the prompt given by the user. In case of legal contracts, it is important for the client to understand his contract requirements to prompt ChatGPT to generate an appropriate response. 

For example, I had a client request for a service agreement, which was a quick request to turn around by using a ready template from my repository. However, upon further questioning I realized that the request is for recurring services agreement and not the standard service agreement.

In such scenarios, ChatGPT’s lack of human judgment and discretion impacts the quality and accuracy of legal contracts it generates.

3. Risk of Invalid Contracts: I’m sure you’ll say - I know my contract requirements so ChatGPT can create all my contracts. Although ChatGPT will generate a contract based on your prompt, the document it generates is pretty much a summary and aggregation of the similar legal contracts it came across in the past. Therefore there is the risk of having an incomplete contract or a contract that is not in compliance with the laws. You need a lawyer to assess the validity of the contract generated by ChatGPT or any other similar AI tool. 

4. Complex Contracts - As illustrated above, ChatGPT is not capable of generating a complex contract covering all the essential terms and conditions. While this AI tool has many advantages, it clearly cannot replace the expertise and service a lawyer has to offer.

5. Legal Developments - ChatGPT is a language tool that generates results based on the information it was trained on until 2021. With a data set that is a couple of years behind, the response will not reflect the recent changes in the legal landscape, implying that the terms and conditions of contract may not be legally accurate. This is crucial limitation of ChatGPT that business owners should be aware of before using it as a contract creation tool

6. Other Limitations:  ChatGPT can only process queries up to 4000 characters and generates responses up to 2048 characters. This  limitation can make it difficult to make ChatGPT write/rewrite longer legal documents. 

Conclusion

So can ChatGPT become an entrepreneurs secret weapon for drafting legal contracts? In my opinion, ChatGPT works well for writing professional content but considering it as a tool for writing legal contracts in particular is questionable.It is a pool for extracting knowledge and information, which will save you hours of time and cost. But it cannot act as a replacement for a legal expert who may analyze this content and ensure you’re protected in case a dispute arises in future. 

What if ChatGPT generated contracts are later found to be faulty or unenforceable? There can be a high level of risk associated with ChatGPT contracts, so you should carefully evaluate the risk for your business before relying on it.

DocPro recommends that small business owners use templates created by lawyers to ensure that their contracts are legally binding, accurate, and up-to-date with current legal developments.

Frequently Asked Questions

1. Is ChatGPT going to replace lawyers?

ChatGPT is a cost-effective way to generate the initial draft of a contract and lawyers may use this tool in combination with their own expertise to prepare comprehensive documents tailored to their clients’ specific needs.[1]

However, small businesses must exercise cautions before relying solely on automated solutions without consulting experts. ChatGPT provides templates that can save you time, it does not replace professional advice when it comes to complex issues like intellectual property rights or other special provisions that require specialized knowledge.[2]

2. What are the legal considerations of using an AI language model like ChatGPT to write contracts?

ChatGPT may not understand the laws specific to your state and may write a contract that is valid in one state, but void in your state. [3]

Whenever AI language models are used in the drafting of contracts, it's important to make sure such contracts conform to all applicable laws and regulations i.e. contract terms or conditions comply with local statutes, as well as any industry-specific standards and requirements, such as those imposed by professional organizations or governing bodies.[4]

It is recommended that any small business have their contracts reviewed by a qualified attorney if they use an AI language model to draft their agreements as they may be held liable for damages or even face legal action depending on the nature of the contract.[5]

3. What are the potential risks for small businesses using ChatGPT to write contracts?

ChatGPT is not a lawyer, so any contract drafted solely by AI could potentially be found to be null and void.[6] 

AI language models like ChatGPT should be used with caution and not as a substitute for legal advice, according to Jeremy Cai, CEO of Italic. ChatGPT generated contracts may not fully conform with all applicable laws and regulations. Contract law may vary depending on the jurisdiction and computer generated contract could lead to discrepancies of what was actually intended, which may ultimately lead to preventable lawsuits or other disputes over clauses in the contract that were unclear due to limitations of artificial intelligence.[7]

In fact copy pasting a contract found even through a Google search can have serious consequences. At best, the contract may not achieve what you want it to. At worst, you could end up losing a significant amount of money by agreeing to something you didn't fully understand or intend to agree to, says Cameron Garrison, Founder and CEO of Guardian Lemon Law Group

[1]Shane McClelland, Founding Partner, The Law Office of Shane McClelland

[2]E. Jay Abt, Founding Partner, The Abt Law Firm

[3]Cameron Garrison, Founder and CEO of Guardian Lemon Law Group 

[4]Shane McClelland, Founding Partner, The Law Office of Shane McClelland

[5]Sean Smallwood, business owner and family law attorney, Sean Smallwood

[6] Jonathan Portner, Managing Partner, Portner & Shure

[7] Rick Hovde, Founding Partner, Hovde Dassow + Deets

Appendix A

1. Photograph License Agreement 

ChatGPT:

DocPro:

2. Confidentiality Agreement for Business

ChatGPT:

DocPro: