Blog: VLP Speaks

AI Terms in Commercial Agreements: Safeguarding Your Business in the Era of Artificial Intelligence – A Blog Post by David Goldenberg

Posted on Dec 2, 2024 in Technology Transactions, Blog by David Goldenberg

A discussion of AI and some legal protections to consider implementing.

Artificial intelligence (AI) has become an integral part of modern commerce, enabling efficiencies and innovations that were once unimaginable. From generative AI tools creating marketing materials to complex machine learning algorithms optimizing supply chains, businesses are increasingly leveraging AI to gain a competitive edge. But with great opportunity comes great responsibility,  including when it comes to commercial agreements.

Why AI Terms Matter in Commercial Agreements

AI systems rely on vast datasets and complex algorithms, which often raise unique legal and ethical considerations. Without clear terms, businesses may face unforeseen liabilities, including intellectual property (IP) infringement, data privacy breaches, or ethical violations. To mitigate these risks, you should consider incorporating tailored AI-related provisions into commercial agreements, and also be wary of terms your counterparties may want to impose on your company.

This blog outlines key AI-specific clauses that startups, investors, and service providers should consider when drafting or negotiating commercial contracts.

1. Representations About Data and Materials Sourcing

AI systems are only as good as the data they are trained on. In many cases, datasets used to develop AI models may include copyrighted material, sensitive information, or data obtained without proper authorization. To ensure compliance, commercial agreements should include robust representations and warranties from AI vendors or collaborators:

• Licensing and Permissions: Confirm that all materials used in training or generating AI outputs were obtained legally, with appropriate licenses where necessary.
• Copyright Compliance: Ensure that the AI system avoids creating outputs that violate third-party copyrights or other intellectual property rights.
• Source Transparency: Where you will be relying on the conclusions which may be generated by the AI, require the party providing the AI system to disclose the origins of all datasets and training materials.

Such representations provide assurance that your business is not inadvertently exposed to legal challenges arising from the unauthorized use of materials.

2. IP Ownership and Indemnity Provisions

A critical issue in AI-related agreements is determining who owns the intellectual property generated by AI. Commercial contracts should explicitly address:

• Ownership of AI Outputs: Specify whether the client, service provider, or AI system developer retains ownership of outputs generated during the engagement.
• IP Indemnity: Require the party supplying the AI solution to indemnify you against claims arising from alleged copyright infringement or other IP violations caused by the AI’s operations.

This clarity not only safeguards your business but also ensures smoother collaboration between parties.

3. Ethical and Regulatory Compliance

As AI-related regulations evolve, businesses must ensure that their systems comply with applicable laws and ethical standards. Contracts should include provisions that:

• Adhere to Current Laws: Mandate that the AI system complies with data privacy laws, anti-discrimination statutes, and other relevant regulations.
• Evolve with Regulations: Include an obligation to update the AI system as new regulations or standards emerge.
• Avoid Bias: Require transparency in the AI’s decision-making processes to prevent discriminatory outcomes.

4. Limiting Liability for AI Failures

AI is powerful but not infallible. Missteps, from incorrect outputs to unanticipated ethical concerns, can lead to significant reputational and financial damage. To manage risks:

• Include tailored limitation-of-liability clauses that account for AI-specific failures.
• Require regular audits and testing of the AI system to mitigate errors.

Conclusion

Incorporating AI-specific terms into your commercial agreements is no longer optional—it’s essential. By addressing sourcing, IP ownership, compliance, and liability in your contracts, you can leverage AI confidently while minimizing risks.

Counsel can play a vital role in navigating these complexities, ensuring you are positioned for success in the AI-driven economy. If you’re implementing AI in your business or negotiating agreements involving AI systems, now is the time to update your contracts and safeguard your interests.

For tailored advice or a consultation, don’t hesitate to reach out.