5 Common Errors When Evaluating Contracts with ChatGPT

ChatGPT is a great way to speed up contract evaluation and reduce costs. You simply paste a 40-page vendor agreement into ChatGPT. Then, you ask it to summarize the risks. After a few seconds, it spits out a clean, confident analysis.

Artificial intelligence (AI) tools are becoming more popular for tasks like these, especially in the legal world. They can spot key clauses, help with language suggestions, and even identify potential issues. With these tools, you feel efficient. You feel modern. But, you might also be making a very expensive mistake.

Let’s walk you through five common errors people make when evaluating contracts with ChatGPT.

1. Privacy and Attorney–Client Privilege Risks

Confidentiality and privilege are the backbone of legal work. When you upload a contract to a public AI tool, you might be throwing both out the window.

• The "Honeypot" Risk: When you upload sensitive contracts into public AI systems, there’s a chance that the data could end up in the hands of third parties. That data might be stored. It might even be used to train future models. More than that, it might be accessible to the platform's employees or subject to subpoena.
• Waiver of Privilege: Attorney-client privilege protects confidential communications between lawyers and clients. Sharing privileged documents with a third party, like a public AI platform, can waive that protection. This can have serious consequences, especially if sensitive business strategies or personal client information are exposed.
• GDPR & HIPAA Compliance: If your contract involves EU personal data or protected health information, you're bound by strict regulations. Uploading that data to a non-compliant AI tool could trigger fines, audits, or lawsuits.

To protect confidentiality and privilege, redact sensitive information before uploading. Strip out names, financials, proprietary terms, and identifying details. Use secure, encrypted platforms that protect your data. You can still use AI. You just need to protect what matters first.

2. AI Hallucinations That Invent Clauses or Legal Obligations

One of the biggest challenges with ChatGPT is its tendency to generate information that sounds plausible but isn’t accurate. This includes fabricating clauses or legal obligations that aren't in the original contract.

• Confident Fabrications: ChatGPT might tell you a clause exists when it doesn't. It might summarize a provision that was never in the document. It might invent obligations, deadlines, or liability caps. The problem is that these fabricated sections might look convincing, leading to incorrect assumptions or actions.
• Fabricated Precedents: AI can cite cases that don't exist. It can reference statutes that were never enacted. It can describe legal standards that sound real but aren't. These false connections can be tempting to trust, especially if you're working under time pressure.

When evaluating contracts with ChatGPT, have a human lawyer or legal expert review the AI’s analysis. Cross-check everything against the original document and any relevant laws or precedents. Treat AI as a first draft, not a final answer.

3. Missing Legal Context and Jurisdictional Requirements

Contracts aren't generic. They're built for specific deals, parties, and legal environments. AI doesn't know that context unless you tell it.

• The "Generalist" Bias: AI, by nature, is a generalist. It doesn’t always understand the full context of the deal or the specific legal system under which it operates. For example, it might treat contracts as if they were drafted in a single jurisdiction, even though your contract may be governed by entirely different laws.
• Missing the "Deal Spirit": Every contract reflects a negotiation. There's history, compromise, and intent behind the language. AI may be able to analyze individual clauses but miss the overall intent or purpose behind the agreement. This is a major risk, especially when negotiating complex contracts.

To make the most of ChatGPT, provide as much context as possible. Include details on the governing law, background information on the parties involved, and any specific requirements related to the transaction. The more context you give, the more relevant the output becomes.

4. Incomplete Contract Analysis Caused by Context Window Limits

AI systems have limits. They can only process so much information at a time. With lengthy contracts, this can lead to problems, especially if the system can’t analyze the entire document in a single pass.

• The Context Window Problem: AI has a "context window" that determines how much text it can process at once. If your contract exceeds that limit, the AI might cut off mid-document. It might skip entire sections. You won't always get a warning.
• Lost in the Middle: In lengthy contracts, the AI may also get “lost” between clauses, meaning it could fail to identify connections between different parts of the agreement. Critical clauses buried in the center might get overlooked. This may result in incomplete or inaccurate analysis.

To prevent these issues, break down the contract into smaller sections or clauses. Review key sections separately: liability, indemnification, termination, and payment terms. Structured prompts will also help guide the AI in thoroughly analyzing each part. This approach makes the review more manageable and less likely to miss critical details.

5. Hidden Bias and One-Sided Logic in AI Contract Analysis

AI outputs can reflect implicit assumptions. It might favor one party without realizing it. These biases can surface in contract reviews, leading to one-sided reasoning or unfair conclusions.

• The "Fairness" Trap: If you ask ChatGPT whether a contract is "fair," it might default to generic notions of balance. But fairness is subjective. It depends on leverage, risk appetite, and deal economics. This could lead to skewed contract terms that don’t reflect a balanced agreement.
• Passive Voice Pitfalls: AI sometimes uses passive voice in contract language. It might say "the buyer is obligated" without emphasizing who benefits or who bears the risk. That framing can obscure one-sided provisions.

When using AI, be clear with your prompts. Ask it to identify any biased or unfair language. Frame your requests so the AI considers both sides of the contract equally. If necessary, ask the AI to highlight clauses that may favor one party over another. Always treat AI as a tool to assist, not a final decision-maker.

Final Thoughts

ChatGPT can accelerate contract review. It can surface issues faster than manual reading. It can help non-lawyers understand complex terms. But it's not a lawyer, it's not infallible, and it's not a substitute for judgment.

However, if you take precautions, provide enough context, and use AI as a complement to human expertise, you can avoid these issues. When you do, you get the best of both worlds: the speed of AI and the reliability of careful legal work.