The Hidden Dangers of Relying on AI for Legal Advice: What SMEs Need to Know

Introduction:
In today's fast-paced business world, speed and efficiency are highly valued. This is especially true for small and medium-sized enterprises (SMEs) who are often juggling strained budgets and facing an uncertain financial climate. In an effort to cut costs and stay ahead of the competition, many SMEs are turning to artificial intelligence (AI) for various aspects of their operations, including legal advice and contract drafting. While this may seem like a smart and cost-effective move, there are hidden risks that SMEs must be aware of when it comes to relying on AI for legal matters.

Source: This article is based on "The hidden risks in AI legal advice: Why SMEs must not confuse speed with strategy" by UKTN.

AI has become deeply ingrained in how UK SMEs operate, offering promises of speed, efficiency, and cost savings.

From marketing automation to financial forecasting, AI tools are being used in various aspects of business operations. It's no surprise then, that many SME founders are turning to AI-generated legal advice and DIY contract templates as part of their toolkit. After all, using AI for legal advice can help keep margins tight in a competitive market. However, the consequences of relying on AI for legal matters are already becoming apparent.

The Issue with AI-generated Legal Advice:

The problem with AI-generated legal advice is not that it is obviously wrong, but rather that it is "almost right." The polished appearance, confident tone, and seemingly relevant information can give SMEs a false sense of security. However, this advice may not accurately reflect the nuances of UK law and procedures and can lead to serious consequences in the event of a dispute.

As dispute lawyers, we often see the consequences of relying on AI-generated legal advice when it's too late. When payment terms break down, scope creeps beyond what was priced, or a counterparty terminates unexpectedly, positions have already hardened, and commercial relationships are under strain. In these situations, the question is no longer how to structure risk properly, but how much damage can be contained for the business.

AI Cannot Replace Professional Judgment:

While AI can draft words and provide information, it cannot exercise judgment. This is a crucial aspect of legal advice and can make all the difference in a live dispute. In a legal dispute, what matters is not whether an argument can be made, but whether it is the right argument to run. AI tools can produce a comprehensive list of potential points without distinguishing between decisive issues and background noise. This can dilute credibility and weaken a company's position in UK litigation, which is highly procedural and has strict expectations around disclosure, evidence, and costs.

Considerations for SMEs:

Before relying on AI-generated legal advice, SMEs should ask themselves a few important questions. Firstly, could the issue materially affect cash flow, reputation, control of the business, or key relationships? If the answer is yes, then it is likely a board-level risk and not an operational shortcut. Secondly, does the advice or contract reflect how the business operates day-to-day? Many disputes arise from unclear expectations and informal variations that were never documented, rather than bad intent. And finally, who owns the risk internally? Controlled risk is identified, documented, allocated, and reviewed, while uncontrolled risk is informal and reactive. AI can generate a document, but it cannot ensure accountability within a business.

The Importance of Professional Judgment:

This is not to say that AI has no place in legal matters. It can be a useful tool for first drafts, issue spotting, and document organization. However, it is crucial to remember that AI cannot replace the professional judgment of experienced lawyers, especially when it comes to legal risk. "Free" or low-cost legal tools may seem like a cost-effective option, but they can end up being the most expensive when they create a false sense of security and lead to costly mistakes in the long run. Fixing a flawed contract mid-dispute will almost always cost more than structuring it properly at the outset.

Innovation in Risk Management:

For tech-enabled SMEs, innovation should extend to how risk is managed, not just how products are built. AI-generated legal advice can be a useful starting point, but when it comes to decisions that could affect cash flow, control, or long-term strategy, it is essential to seek the expertise of experienced lawyers who understand the nuances of UK law and procedures.

In Conclusion:

While speed and efficiency are valuable in business, when it comes to legal risk, strategy is what protects growth. SMEs must not confuse the speed and convenience of AI-generated legal advice with proper risk management. It is crucial to understand the limitations of AI and seek professional judgment when making important legal decisions.

Source: https://www.uktech.news/news/the-hidden-risks-in-ai-legal-advice-why-smes-must-not-confuse-speed-with-strategy-20200420