Engaging with an Artificial Intelligence (“AI”) service provider entails navigating a complex legal landscape. To develop a successful partnership, your organization must carefully address key legal considerations before signing a contract. This article outlines essential best practices for contracting with AI service providers.
AI companies and their services are relatively new in the business world. Your organization must conduct comprehensive due diligence on the AI service provider. Review the company’s status on the California Secretary of State website to confirm good standing, examine publicly available reviews, request references from other customers, and evaluate how long the company has been in business and how long the product has been operational. Investigate the company’s financial health to understand its overall stability and reliability. By assessing these factors, your organization can avoid partnering with an unstable or unreliable provider.
Your organization needs to identify the types of data it will share with the AI provider to provide the offered services. After determining what data will be shared, assess the legal restrictions or protections associated with that data. For example, consider whether the data includes employee information, pupil records, or non-public business information. If your organization shares any confidential information, the contract must clearly define each party’s responsibilities for complying with applicable laws. Additionally, the contract should specify who holds legal responsibility for a breach of confidential information.
The contract should also explicitly state who holds ownership of the data (both input and output). Typically, your organization should retain ownership of its data. However, AI providers may request rights to aggregated anonymized data or data in a form that they can use for their own purposes. Scrutinize these provisions carefully to ensure the AI service provider does not use the data in ways that violate privacy laws or your organization’s policies.
Require the AI provider to assume liability in the event of a data breach. Specify their obligations under data breach laws and notification requirements to ensure clear accountability for immediate actions following a breach of confidential information. The contract should clearly state the consequences of any breach of the data obligations or contract violations. Include indemnification provisions that hold the AI provider accountable for any third party claims arising from their AI services. These provisions will help your organization mitigate potential fiscal risks in the event issues occur with the services.
Draft a strong termination provision to give your organization significant leverage throughout the contract term. Ensure the clause allows for termination if the AI provider’s services fall short of expectations, fail to meet your needs, or do not comply with the contract requirements. Protect your organization in the event the AI provider abruptly cancels by requiring notice and reimbursement requirements.
Clearly define how the AI provider must handle data at the conclusion of the relationship. Specify the return or destruction of data and establish timelines for completing these actions.
Contracting with an AI service provider requires careful attention to multiple factors. By conducting due diligence, understanding data protection and ownership rights, establishing liability obligations, and anticipating contract termination, your organization can set itself up for a successful partnership. Although this list is not exhaustive, it highlights critical considerations for evaluating AI service contracts. Engaging legal counsel to review the agreement will further reduce risks and ensure the contract is tailored to the specific needs of your organization.