Drafting Effective Contracts for Generative AI: Tips for Small Business in Florida

Artificial intelligence (AI) is a hotly discussed tool lately and businesses in Florida are looking to use AI to increase efficiency and gain a competitive edge. It’s important that the contracts governing the use of AI are carefully drafted, whether a business develops its own AI or licenses it from a third party. A poorly drafted contract can expose a business to risk, including financial losses and legal liability. In this article, we’ll generally summarize an overview of some tips for small businesses in Florida regarding drafting effective general contracts for generative AI.

Business owners should consider that the contractual agreements include representations and warranties from the licensor of the AI. For instance, this includes the right to contract and license the AI, disclaimers and warranties, and that the AI functions as intended. For example, a small accounting firm in Florida that licenses AI for bookkeeping purposes could try to include in the contract a representation that the licensor has the right to license the AI and a warranty regarding malfunction.

Indemnification provisions are generally used to shift potential risks and costs from one party to another. A business may try to have the indemnification cover any breach of the agreement, including the representations and warranties. The business may also try to have the indemnification provision require the indemnifying party’s responsibility to extend to any loss, cost, or damage incurred by any third party.

A limitation of liability provision aims to limit a party’s financial exposure if a claim is made or a lawsuit is filed. This may be important in AI-related agreements where a system failure could expose a business to risk. For example, a system failure could unintentionally expose sensitive information. As such, one or both parties may try to include in the contract a limitation of liability provision that caps their financial exposure in the event of an AI-related failure.

Agreements often incorporate insurance obligations requiring one or both of the parties to obtain and maintain adequate insurance coverage. For example, a small marketing agency in Florida that develops its own AI for social media analytics could include in the contract an insurance obligation requiring one or both parties to obtain and maintain adequate insurance coverage. The type and amount of insurance can depend on the needs of the parties and the risks.

It is important to draft effective business contracts, including contracts concerning AI. Businesses can seek to minimize their risk by including provisions in AI contracts such as representations and warranties, indemnification provisions, limitation of liability, and insurance obligations that are designed depending on the needs of the business(es). Consider seeking the assistance of an attorney to assist at the outset. Click here to contact Guala Law Firm if you need legal advice or assistance.