Artificial Intelligence (AI) is revolutionizing numerous sectors worldwide, including the legal industry, where its impact on contract law is particularly transformative. The face of contract law has evolved from conventional contracting to an AI-fuelled modus operandi. AI comprises technologies namely; machine learning algorithms and smart contracts, which automate and enhance various aspects of contract formation, interpretation, performance, and enforcement. Therefore, integrating AI’s benefits into contract law remains crucial for its future development.
Impact on contract formation
The traditional method of contract formation relies on direct communication and a meeting of the minds between human parties with the collective bargaining power. However, the introduction of AI involves complicating this process. The AI systems can automate contract drafting and negotiation processes by exercising natural language processing and machine learning to generate contract clauses effortlessly.
Due to this, such automation raises questions about the traditional requirement of mutual agreement, as contracts can only be formed with minimal human intervention. Moreover, as noted by Katz and Bommarito in their article titled “Legal Informatics: A Bottom-Up Approach to Legal Innovation” ‘AI can significantly impact the contractual landscape by enhancing the drafting process and reducing transactional costs.’ Thus, the elements of contract law impacted by AI include:
- Offer and Acceptance: AI can automate offer creation and send them electronically, ensuring swiftness and reducing errors. However, an offer must be communicated clearly to the offeree to constitute a valid offer. For example, if a company’s dynamic pricing algorithm mistakenly offers a $10,000 piece of equipment for $10, is that a legally valid offer that was clearly communicated? An AI-automated acceptance must also be clearly communicated to the offeror, to avoid disputes about contractual formation.
- Capacity and Intent: A contract’s obligation depends on the individual intentions expressed. AI, in its current form, lacks the legal personality and subjective consciousness attributed to human beings. It operates based on algorithms developed by humans. This can lead to conflicts, as algorithms might favor certain contractual interpretations based on historical data, without regard to fairness principles. This static nature may not accommodate changes in the intent of the parties after the contract is formed.
- Transparency and Understanding: AI-written contract formation can operate as a “black box” because its decision-making processes are not easily comprehensible to human observers. The opacity of AI algorithms poses challenges in understanding how decisions are made. Moreover, AI systems may inherit biases from their training data, leading to biased outcomes. This is particularly concerning in sensitive areas such as employment contracts and financial agreements, where fairness and equity are paramount.
- E-Contracts: In E-Contracts, the agreement is made online, which creates a mutual obligation between two parties. The electronic contract is considered as a promising tool. Unlike traditional paper contracts which are likely to forgery and theft, it enables automated workflows where the contract signing can engender automatic invoicing, streamlining financial processes.
Impact on contract performance
AI technologies can monitor and track contract performance in real time, ensuring that parties comply with timelines and quality requirements. Analytical systems operated by AI can trigger alerts when they discern any deviations from accepted performance variables. Similarly, AI analyzes past contract performance data to predict future outcomes and detect potential risks of non-performance. Parties adopting this approach can mitigate risks and optimize contract management strategies in advance.
Furthermore, the rise of smart contracts is a vital component of contract performance. Utilizing blockchain technology, smart contracts are self-executing computer programs that automate contract execution based on predefined conditions. Since these contracts are performed and verified without any involvement of middlemen, they are set to modify existing contractual practices because they increase the contract execution time frame and minimize transaction expenses.
Impact on Contract Enforcement
When AI acts without human intervention, determining who is responsible for errors or breaches becomes a complex phenomenon. To define liability, necessary arrangements on existing laws and regulations are vital. When an AI system erroneously enforces a contract, tracing the root cause poses huge challenges. This complexity stems from the same black box operations, the problem discussed in contract formation, making it difficult to assign blame or accusations.
In numerous cases, liability for errors might need to be shared among several parties, including AI developers, providers, users and third parties. For example, if a smart contract fails due to a flaw in its code, is the developer who wrote the code liable, or is it the user who implemented such faulty contract?
A contract involving the use of AI may epitomise specific clauses to address disputes related to AI errors and provide indemnification to aggrieved parties. The creation of such clauses necessitates careful consideration of possible dangers and liabilities.
Moreover, addressing AI system errors depends heavily on ethical considerations, which is indispensable for resolving issues of AI decision-making bias that produces differential treatment to parties. The court’s decision, with pertinent case laws, can serve as a principal force to define liability rules for increasing AI integration.
Legal frameworks and futurity
To address the AI-driven challenges, a handful of legal frameworks must be properly adapted;
- Legislators need to revise existing legal definitions for AI in contract law, with special recognition for AI as either an independent legal entity or a facilitating agent.
- New regulations must establish unique principles to deal with AI-related aspects within contract law, encompassing rules for AI contract formation, performance and dispute settlement mechanisms.
- International cooperation should be strengthened to establish standards and agreements to manage cross-border issues erupting from AI-fuelled contracts.
Nevertheless, integration of AI into contract law represents significant transformation in the legal industry. The AI-fuelled contract formation, performance, and enforcement constitute notable conveniences, including enhanced effectiveness, cost savings, and improved compliance.
By fostering collaboration between legal professionals, AI developers, regulators, and users, the prospect of AI in contract formation and enforcement can be maximized while accountability, fairness, and security are ensured.
For a successful integration of such complexities, collaborative, multi-stakeholder approaches should be developed for broad-based ethical frameworks and regulatory guidelines. Therefore, legal frameworks must remain changeable to accommodate the transformative impact of AI on contract law.
