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AI Contracts: What Every Business Owner Needs to Know

AI is transforming how businesses operate—but your contracts may not be keeping pace.

July 15, 2026

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Artificial intelligence has moved from the sidelines to the center of daily business operations. Companies of all sizes now use AI-powered tools for customer service, data analytics, HR, marketing, and supply chain management. Yet despite the enthusiasm, many businesses sign AI-related agreements without fully understanding their legal exposure.

As an attorney who advises businesses on contracts and risk management, I see this gap widening. The law is racing to catch up with the technology, and in the meantime, business owners are signing vendor agreements, licenses, and service contracts that leave critical questions unanswered. Understanding where these contracts fall short is the first step toward protecting your company.

Ownership of AI-Generated Work Product

One of the most important issues in any AI contract is intellectual property ownership. When your company uses an AI tool to generate marketing copy, design assets, code, or reports, who owns the output? The answer is less straightforward than most business owners assume.

Many AI vendor agreements include broad language granting the vendor rights to outputs—or they disclaim ownership altogether, leaving a legal gray area. Businesses should insist on clear language specifying that they retain full ownership of anything generated through the tool, and that the vendor won’t use the company’s inputs or outputs to train its models without explicit written consent.

Before signing, determine who owns the deliverables generated through the AI platform.

Data Privacy and Security Obligations

AI tools are only as powerful as the data they process—meaning your proprietary information, customer data, and trade secrets may be flowing into third-party systems. A well-drafted contract must address how the vendor collects, stores, processes, and protects that data.

Look for provisions covering data encryption, breach notification timelines, retention and deletion policies, and compliance with applicable privacy laws. If the vendor operates internationally, ensure the contract addresses cross-border data transfer requirements. Vague assurances about “industry-standard security” aren’t sufficient.

Before signing, confirm how your data is stored, retained, and deleted.

Indemnification and Liability Allocation

AI systems can produce inaccurate, biased, or even defamatory outputs. If your business relies on a tool that generates flawed recommendations or content, who bears the consequences? Many vendor contracts cap liability at a fraction of fees paid while offering little or no indemnification for the technology’s errors.

Business owners should negotiate indemnification provisions covering intellectual property infringement, data breaches caused by vendor negligence, and regulatory penalties from the vendor’s noncompliance. The allocation of risk should reflect the reality that the vendor controls the tool and its underlying algorithms.

Before signing, understand who is liable if the AI produces inaccurate or infringing content.

Termination and Transition Rights

Businesses that deeply integrate AI tools into their operations may find themselves locked into relationships that are hard to exit. A strong contract should include clear termination rights, reasonable notice and cure periods, and detailed transition provisions guaranteeing the return or deletion of company data. Without these protections, switching vendors can become prohibitively expensive and disruptive.

Before signing, ask: If we decide to leave this platform, how quickly can we retrieve our data, in what format will it be returned, and what happens to it once the contract ends?

Regulatory Compliance and Future-Proofing

The legal landscape for AI is evolving rapidly. Several states have enacted or proposed legislation governing automated decision-making, algorithmic bias, and AI transparency. A forward-looking contract should include vendor representations about complying with applicable laws as they evolve, along with mechanisms for updating the agreement as new requirements emerge.

Before signing, ask: Does the agreement require the vendor to comply with new AI laws as they are enacted, and will the contract be updated if regulatory requirements change?

The Bottom Line

AI adoption isn’t slowing down, and neither is the legal complexity surrounding it. Business owners who treat AI vendor agreements as routine procurement contracts are exposing themselves to significant—and often invisible—risk. Before signing your next AI agreement, take time to review it with counsel who understands both the technology and the legal frameworks governing it. The contract you sign today will define your rights, exposure, and flexibility for years to come.

A proactive approach to AI contracting isn’t optional anymore—it’s a competitive necessity.

If you find yourself with this business need, please contact me at 301-340-2020 or visit steinsperling.com for more firm information. Written by Stein Sperling Attorney, Andrew Schwartz.

Originally published at Bethesdamagazine