The Legal Impact of Artificial Intelligence-Generated Contracts

Author: Anshika Awasthi, University of Petroleum and Energy Studies

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Abstract

The advent of Artificial Intelligence (AI) has revolutionized the field of law through the automation of the entire process of drafting, reviewing, negotiating, and enforcing contracts. Whereas the use of AI for contract generation makes the process efficient and effective as well as reduces costs, AI raises challenges regarding several core concepts of contract law. The principles like free consent, intention to create legal relations, contractual capacity, and liability are formulated on the basis of the idea that legal decisions are made by humans. AI-based contracts undermine the validity of this assumption through the introduction of autonomous systems into contractual relations. This paper explores the legal challenges raised by AI-based contracts and evaluates their validity, enforceability, liability, and regulation under Indian law. In addition, it will be compared to similar legal positions in the USA, the UK, and the EU (especially after the passage of the EU AI Act). Utilizing the doctrinal and comparative approach, this paper will analyze the relevant statutes, case laws, and the academic sources and evaluate whether the current legal framework is capable of regulating AI-based contractual relations.

Keywords: Artificial Intelligence, AI-Generated Contracts, Indian Contract Act, Smart Contracts, Contract Law.

Introduction

Legal practice used to be considered among the least vulnerable domains for technological disruption. Writing of contracts, negotiation of terms, document review and interpretation were always done relying on human judgment, expertise and common sense. However, the recent breakthroughs in Artificial Intelligence (AI) have completely changed the equation. AI can draft commercial agreements, analyze complex contracts within minutes, identify legal risks and suggest changes in them, predict litigation results and even execute the contractual obligations using smart contracts. What seemed to be science fiction has quickly turned into reality for the law firms, multinational companies, banks and e-commerce platforms.

The growing use of AI in contract management raises a number of important legal issues which traditional contract law is not geared to address. In accordance with the principles of traditional contract law the parties entering into an agreement must have a certain capacity, act voluntarily, be aware of the possible consequences of their actions and mutually agree upon contractual obligations. AI-based systems do not possess any of these qualities, as they are just computer programs running on specific algorithms and providing an output in the form of some prediction based on statistical probability.

In India, the legality of contracts is still governed by the Indian Contract Act of 1872, whereas electronic transactions are regulated by the Information Technology Act of 2000. While both statutes provide an enabling framework for electronic agreements, they do not speak anything about autonomous artificial intelligence systems involved in contract formation. Consequently, there exist issues related to enforceability, attribution of liabilities, consumer protection, data privacy and dispute resolution in cases of contracts with participation of autonomous AI. The same concerns apply on a global scale, which made it necessary for the EU to introduce the EU Artificial Intelligence Act and other countries, including the US and UK, still use existing contractual principles along with case law.

The issues related to AI-generated contracts go beyond issues of efficiency. There are questions of algorithmic transparency, explainability, fairness and accountability along with issues of contractual autonomy. If people become to use more and more AI-generated recommendations and do not understand how the recommendations were generated, the idea of informed consent will become obsolete with time. Also, automated execution of obligations through the use of blockchain and smart contracts makes additional problems because contracts would be executed automatically without any human intervention.

In this context, this study tries to explore if current contract law principles have the capacity to regulate AI generated contracts or whether special laws are needed. The study explores the validity and enforceability of AI generated contracts, liability for mistakes made by algorithms, the international approach to AI regulation and suggests possible changes which can help the law adapt to technology. Instead of considering AI as a substitute for lawyers, this paper takes the position that AI should be considered as an aid working under a legal framework.

Literature Review

The rising application of Artificial Intelligence in contracts has been a subject matter of considerable scholarly interest in recent years. The existing literature appears to be unanimous on the point that AI holds enormous potential for transforming the contract drafting and management by way of making these processes more efficient and consistent while lowering transaction costs at the same time. Yet, scholars disagree on whether the current principles of contract law provide enough flexibility for accommodating autonomous decision-making or whether an entirely new set of doctrines needs to be developed.

Among other contributions, the recently conducted study of Exploring the Legal Impact of Artificial Intelligence on Contract Interpretation and Execution (2026) looks into the effect of AI on the contractual interpretation in different jurisdictions. It posits that AI considerably increases the consistency of the contracts and makes them less ambiguous due to natural language processing and machine learning. The results of the empirical research show that in many cases, AI-based interpretation leads to textual uniformity higher than that of traditional human-based interpretation. At the same time, the research brings up several important issues related to explainability, acceptability in courts, transparency, and attribution of contractual intent.

In the same way, the paper 'Legal Implications of AI-Generated Contracts' (2025) is centered on the legal system in India. In analyzing AI-generated contracts, the paper uses the context of the Indian Contract Act of 1872, which includes conditions such as an offer, acceptance, free consent, consideration, contractual capacity, and intention to create legal relations. The conclusion is that there is no restriction in the law of contracts in relation to AI-generated contracts, but uncertainty emerges when AI decides on the terms of the contract without adequate control by humans.

Other important contributions include Legal Implications of AI-Generated Contracts: Validity, Enforcement and Liability for Errors (2026). This work has an expanded comparative perspective, as it evaluates regulatory changes taking place in India, the US, Canada, and Europe. In contrast to previous works that mainly focused on the problem of the validity of AI-generated contracts, this work pays much attention to problems related to enforcement, the problem of opaqueness of algorithms, issues of consumers' protection, and the issue of liability of developers, deployers, and users of AI systems. The authors state that even if AI-generated contracts can comply with legal norms in most cases, the increased autonomy of such contracts requires special legal regulation to be established to regulate problems of transparency and explainability.

Outside these studies, there is increasing scholarship in the international community focusing not only on the technological but also the theoretical aspect of AI. Writers like Ryan Calo, Mireille Hildebrandt, and Omri Ben-Shahar emphasize the extent to which AI defies the concepts of consent, intention, agency, and autonomy in the law of contract. In lieu of AI being recognized as a new contracting entity, the majority of scholars suggest recognizing AI as a technologically advanced tool, whose actions can still be attributed to human actors. This will ensure the perpetuation of existing doctrines concerning contract in tandem with technological innovation.

Notwithstanding the exponential growth of the field of study, there are still a number of areas that need to be considered. For instance, most of the research is concerned primarily with the legislative systems of developed countries while paying little heed to the legislative structure of India. Current scholarly work fails to address many issues in relation to AI in contracts comprehensively and often considers them in isolation; issues like enforceability and liability are discussed in isolation without a broader picture of validity, interpretation, data governance, and future legislative reforms.

Consequently, the current research endeavor aims at closing these gaps through a holistic and comparative methodology. The analysis will be conducted within the larger context of the laws governing contractual relations in India, with important lessons learned from global trends in regulating technologies. In this sense, the research is not only aimed at highlighting the legal issues involved, but also finding practical solutions to ensure that technological progress occurs in compliance with the general rules of contractual relations.

Research Methodology

The research uses a doctrinal approach to legal research that mostly involves studying of statutes, precedents, academic writings, journal publications, government publications, and international legal instruments. Considering the evolving nature of the law concerning the use of AI in making contracts, a doctrinal approach to research will be most suitable to investigate whether existing laws can handle technology developments in contracts.

All sources of information used in the research are secondary sources of data. The relevant sections of the Indian Contract Act 1872, the Information Technology Act 2000, the Digital Personal Data Protection Act 2023, and other international regulations like the EU Artificial Intelligence Act are examined to establish the current position of the law. The judicial cases in India along with the significant precedent cases outside India on electronic contracts, automated contracting systems, and artificial intelligence have also been considered.

Along with doctrinal research, the paper is based on a comparative legal approach since there have been no specific laws formulated for AI-based contracts in India. The comparative analysis of the Indian legal system with the systems of other countries, including the EU, the USA, and the UK, will give some ideas about how such regulation might look like. In addition, comparative analysis will help to find out the best practices for transparency, accountability, consumer protection, and liability allocation.

Moreover, the study relies on a critical legal approach, which implies not only the description of the current legal position but also the analysis of its efficiency regarding the modern times when the offer and acceptance of contract terms can be made by the autonomous systems of artificial intelligence. Where required, practical problems related to business, legal profession, consumers and regulatory authorities will be analyzed.

In addition to analyzing the current legal system, this methodology aims to evaluate how effective it is and to suggest changes which would allow to strike a balance between technology advancement and legal predictability. This research uses statutory interpretation, comparative methods, and critical legal theory to get an overview of the impact of AI-contracts from a legal perspective.

Legal Validity of AI-Generated Contracts

Understanding AI-Generated Contracts

Artificial intelligence has transformed from a supportive tool to a party actively involved in business dealings. In recent times, AI is capable of drafting contracts, negotiating contractual terms, detecting legal issues, making suggestions and in some cases performing contractual duties through an automated system. The increasing utilization of AI by businesses is due to the considerable reduction in time needed for drafting, human errors and costs associated with transactions. Large firms utilize AI technology for drafting routine contracts such as employment and non-disclosure agreements along with very complex business deals dealing with mergers, finance, insurance and international trade.

However, with all the advances in technology, artificial intelligence lacks legal capacity. It is incapable of comprehending legal repercussions and forming intentions independently. Instead, its operation depends upon the processing of vast amounts of data, identifying patterns in language and producing outputs depending upon algorithms. Therefore, the legality of AI contracts hinges upon the satisfaction of the requirement set out under contract law rather than AI itself.

However, the growing independence of AI poses a key legal issue – at which point will AI stop being an aid for drawing up a contract and start affecting the decisions regarding the contractual relationship and thus the legal rights and obligations of the contracting parties? This is the crux of the contemporary debate about AI-based contracts.

Offer and Acceptance

Any legally binding contract begins from a valid offer and unconditional acceptance of it. The existence of these two components forms the essence of contract formation under Sections 2(a) and 2(b) of the Indian Contract Act of 1872. Conventionally, these are always made with the intention of human beings. In AI-generated contracts, however, these intentions can arise out of software which independently generates offers and accepts preconditions.

Conventionally, in business scenarios, AI works in accordance with instructions given to it by its human users. In e-commerce businesses, there can be automatic generation of purchase agreements upon receipt of payment. In procurements, prices can be negotiated automatically within the set range and an offer accepted. In all such cases, AI is only executing instructions provided by the human parties. Hence, the intention in the case of contract formation continues to be that of the human being who utilises the AI software.

But problems become more difficult to solve when more advanced AI is used to make changes to contract terms or even renegotiate contract terms beyond its programming. It will become more challenging for the court to ascertain that both parties have actually agreed on something when such a situation occurs.

Free Consent and Intention to Create Legal Relations

Another very important provision in the Indian Contract Act is free consent. Consent gained through coercion, fraud, undue influence, misrepresentation, and mistake makes the contract void or voidable, depending on the circumstances. AI-generated contracts create new dimensions for this rule due to the fact that algorithmic decisions can sometimes lack transparency.

Most advanced AI programs operate as "black boxes," which produce results but do not explain how they come up with certain suggestions related to the contracts. In case one of the parties relies exclusively on AI-generated advice without knowledge of possible biases, errors in training data, or algorithmic mistakes, their consent might raise concerns about its legality. Even though the user consents to the contract, the nature of his/her consent might be questionable because of lack of understanding of the technology that created the contract terms.

In the same way, the intention to create legal relations has traditionally been connected to conscious decision-making of humans. The AI program itself cannot have a legal intention because it lacks consciousness, free will, and independent judgment. Therefore, any intention to create legal relations in case of AI-generated contracts should always be attributed to human agents.

Contractual Capacity and the Legal Status of Artificial Intelligence

The essential conditions of a valid contract under Section 11 of the Indian Contract Act, 1872 state that everyone who makes an agreement must be competent to contract. To be competent, a person has to have attained the age of majority, have a sound mind and not be under any legal disability. This is because a contract arises when legally recognized persons take decisions and understand the implications of their actions.

However, this does not mean that the contracts produced through AI are not valid. Most of the commercial transactions involve the use of AI as a sophisticated technological tool to facilitate communication or negotiate contracts between parties. Therefore, the legal obligations lie with the individual who was authorized to use such AI.

Scholars have suggested giving partial legal recognition to sophisticated AI-based systems. In this context, as the ability of AI to make decisions independently increases, conventional conceptions of agency will no longer be adequate. But if AI is recognised as a legal person, it will mean changing the basic tenets of contract law and raising difficult issues in relation to rights, liabilities, tax, property, and constitutional responsibility. Currently, there is no legal recognition of AI as a separate legal entity either in India or in the majority of other jurisdictions.

Electronic Contracts, Smart Contracts and the Information Technology Act, 2000

The rapid growth in electronic commerce has already shown that contracts do not have to exist in paper form for the purposes of enforceability. Under the provisions of the Information Technology Act, 2000, and the Indian Contract Act, electronic records and signatures are considered legally binding. In other words, such acts help to enable electronic transactions. Agreements made via emails, websites, mobile apps and e-platforms are considered legally valid when all the necessary elements of contract formation are present.

One of the recent phenomena is that of smart contracts, which are computerized programs recorded in a blockchain network and executed autonomously upon the fulfillment of certain criteria. Such types of contracts reduce human intervention and minimize the chance of delayed performance of the agreement. For instance, a claim of an insurance company can be executed without any human action when the required conditions are confirmed.

Although smart contracts possess several business benefits, there are also legal issues associated with it. Traditional contracts have provisions to renegotiate or grant equitable remedies in case of unexpected scenarios. In contrast, smart contracts operate on the basis of their programmed instructions irrespective of whether subsequent circumstances necessitate modification or suspension of obligations under the contract. This might pose problems related to certain established legal principles like frustration, mistake, unconscionable agreement, or equitable remedy.

Judicial Developments and Comparative Legal Position

Even though litigation involving AI-generated contracts has not been widespread, courts of various jurisdictions have come to recognise the increasing significance of technology in contracts.

In the USA, through the landmark case ProCD Inc. v. Zeidenberg and Specht v. Netscape Communications Corp.Judicial decisions related to the issue of electronic contracts have confirmed that such contracts can be considered legally binding as long as parties involved in the transaction have received sufficient notice and voluntarily accepted the contract.

English law has been no less practical, as it recognises electronic contracts by applying general principles of contractual law instead of developing legislation solely dedicated to digital contracts. In particular, the court has always paid attention to intention, certainty, and voluntary acceptance regardless of whether contracts have been negotiated physically or electronically.

Currently, India adopts an extremely conservative stance. The Indian Contract Act, 1872, and the Information Technology Act, 2000 together recognize electronic transactions, but do not have any provision regarding autonomous AI in relation to formation of contract. It is clear that Indian courts will decide these issues keeping in mind traditional contract law principles and also considering technology in each individual case.

It is evident from above comparative discussion that currently no jurisdiction in the world has a legal system regulating AI-made contracts. However, the global trend definitely seems to favor the retention of human responsibility while requiring more transparency from AI. India will gain a lot from this development in terms of formulating laws which will regulate AI-assisted contracts without violating core principles of contract law.

Enforcement Challenges and Liability in AI-Generated Contracts

Enforceability of AI-generated agreements continues to be one of the most controversial problems of modern contract law. Although many legal systems consider electronic agreements as being legally valid, the growing independence of artificial intelligence poses new challenges which cannot be easily accommodated by classical legal principles.

The first problem relates to attribution of contractual activity. It is easy to attribute responsibility for contract terms created by a person. However, in case of independently recommended clauses, modifications or negotiations performed by AI systems, it becomes hard to establish responsibility. For instance, in case of a dispute about any unfair clause or inaccurate statement in a contract, courts have to figure out whether responsibility belongs to a user, developer, deploying organization, or all of them combined.

Another important problem is the so-called "black box" problem. In case of advanced AI systems, results are achieved without clear explanation how exactly they were achieved. As a result, a court or any arbitrator faces difficulties in establishing whether any contractual term actually represents agreement of the contracting parties or just recommendations produced by some algorithms in a black box.

The third area concerns interpretation. It is common practice in traditional courts to interpret contractual wording in light of the intent behind the contract and the context. Automated language could lack the context of reasoning that usually accompanies human contract drafting. The resulting disputes arising from vague wording drafted by AI could become much harder to solve using traditional methods of contract interpretation.

Finally, cross-jurisdictional AI contract negotiation raises the problem of jurisdiction. Automated platforms tend to operate in more than one country at once. Choosing the appropriate law to apply, as well as the jurisdiction to use in case of disputes, could be exceedingly complicated in such cases.

Discussion

The creation of AI-based contracts has been the biggest change in contemporary contract law. Despite the fact that new technologies have greatly enhanced the efficiency and accessibility of contractual relations, they have questioned some basic principles on which traditional contract law relies. It was generally accepted by the legal system that the parties enter into contractual relations consciously. In such cases, it is important to consider whether the involvement of software in making decisions requires changes in the current principles.

It should be noted that one of the biggest results of the conducted research is the fact that AI currently does not change the basic principles of contract law. All the fundamental elements of contract, including offer, acceptance, lawful consideration, free consent, capacity to make a contract, and intention to enter into contractual relations, remain the same despite the fact whether the contract was made manually or using AI.

Nevertheless, the above conclusion does not mean that reforms are unnecessary. Increasingly sophisticated AI technology leads to blurring the boundary between "assistance" and "autonomous decision-making." While former AI technologies were just tools for automation of drafting process, the current generative AI is able to negotiate terms, evaluate business risks, suggest changes and create legally sound agreements with little human involvement. In the future, even more sophisticated tasks will be performed by AI technologies. Thus, applying the rules of contract law developed in the nineteenth century could become insufficient.

Transparency is yet another vital principle emphasized by this research. Contracts created with the help of artificial intelligence technology must never be so complicated that their creators cannot comprehend the reason why certain contractual clauses have been created. It would not only be unethical but will not meet the technical requirements. It is also important to note that transparency and accountablity is connected to the doctrine of informed consent since where parties do not understand how their contract was prepared, consent becomes mere fiction.

Moreover, AI-generated contracts can affect consumer rights. In recent years, many large companies have started using advanced legal technologies for processing vast amounts of commercial data. Consumers and small businesses do not have such technology available. Therefore, AI technology may unintentionally create an imbalance in the parties’ bargaining power, which may result in the creation of increasingly favorable contractual terms for economically more powerful parties.

This research recommends that India implement the risk-based regulatory approach whereby the level of legal oversight will vary according to the impact that the generated AI contracts will have on the parties involved. Commercial agreements made by AI through simple transactions may need little, if any, regulatory scrutiny, but those systems creating high-value commercial agreements, financial agreements, medical documents, insurance policies, and consumer contracts must continue to be subjected to legal obligations of transparency and oversight.

This will promote innovation while ensuring that certainty and fairness remain at the core of the contract law regime.

Conclusion

Artificial Intelligence has completely changed the way contracts are made, bargained, negotiated, and signed. The process that was purely human before is now facilitated by advanced AI systems that can create legally formed contracts within a matter of seconds. Such technology has definitely helped to increase efficiency, cut down on expenses, eliminate redundant legal work, and raise productivity. However, it has also revealed major flaws in the traditional laws concerning contracts, particularly when it comes to contractual intention, legal capacity, accountability, transparency, and liability.

As it has been shown in the analysis of this paper, the current rules of contract law are flexible enough to recognize AI contracts provided that all the necessary elements of a valid contract, including offer, acceptance, freedom of consent, lawful consideration, legal capacity of parties, and intention to create a legally binding relationship, are satisfied by identifiable human beings. Artificial Intelligence currently does not have the legal personality, consciousness, and capacity to enter into a legally binding agreement and thus cannot be regarded as a party to any contract made using AI.

Nevertheless, the growing independence of AI raises problems which cannot be sufficiently resolved by means of judicial interpretation. The problems connected with algorithmic opacity, biased decisions, cross-border transactions, allocation of liability, consumer protection and performance of contracts automatically need legislative solutions. India has recognized the validity of electronic contracts as per the Indian Contract Act, 1872 and Information Technology Act, 2000, however, the legislation does not make any provisions for AI-generated contracts. With further introduction of AI in business practices, the silence of legislature on this issue might give rise to uncertainty in judicial rulings.

From the comparative law perspective, it is evident that jurisdictions such as the European Union have already started addressing the abovementioned problems through risk-based regulation which focuses on transparency, accountability and human control. Despite the fact that no jurisdiction has yet formulated an exhaustive legal regime which would regulate AI-generated contracts, the international experience indicates the trend towards regulation of AI depending on the degree of its risk rather than its prohibition.

References

Books

• Richard Susskind, Tomorrow’s Lawyers: An Introduction to Your Future 39–58 (2d ed., Oxford Univ. Press 2017).

Journal Articles

• Al-Dahammsheh Mohammad Alian Mafleh et al., Exploring the Legal Impact of Artificial Intelligence on Contract Interpretation and Execution, 16 Indian J. Info. Sources & Serv. 637 (2026).

• Cary Coglianese & David Lehr, Regulating by Robot: Administrative Decision Making in the Machine-Learning Era, 105 Geo. L.J. 1147, 1150–55 (2017).

• Parth Dixit & Neeti Nitin Pandey, Legal Implications of AI-Generated Contracts: Validity, Enforcement and Error Liability, 4 Lex Scripta J. 1 (2026).

• Ryan Calo, Artificial Intelligence and the Future of Contract Law, 48 U.C. Davis L. Rev. 399 (2021).

• Ujjwal Jain, Legal Implications of AI-Generated Contracts, 13 Int’l J. Creative Res. Thoughts, p. 9 (2025).

Cases

• Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas, AIR 1966 SC 543.

• Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256.

• Moffatt v. Air Canada, 2024 BCCRT 149.

• ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).

• Shakti Bhog Foods Ltd. v. Kola Shipping Ltd., (2009) 2 SCC 134.

• Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002).

• Thornton v. Shoe Lane Parking Ltd., [1971] 2 Q.B. 163.

• Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., (2010) 3 SCC 1.

Statutes

• Consumer Protection Act, 2019, No. 35, Acts of Parliament, 2019 (India).

• Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872, §§ 2(a), 2(b), 2(h), 10, 13–19 (India).

• Government Reports and Institutional Materials

• Law Commission of England and Wales, Smart Legal Contracts: Advice to Government (2021).

• NITI Aayog, Responsible AI for All: Approach Document for India 11–27 (2021).

International Instruments and Policy Documents

• European Parliament Res. 2015/2103(INL), with Recommendations to the Commission on Civil Law Rules on Robotics (Feb. 16, 2017).

• Organisation for Economic Co-operation and Development (OECD), OECD Principles on Artificial Intelligence(May 22, 2019).