INTRODUCTION

Service providers and service recipients must urgently revise their existing service contracts to incorporate provisions that address the emerging possibilities and complexities brought on by artificial intelligence (AI). The rapid advancement of AI technology in the present time has created a significant gap in traditional contractual foundations which leaves the contracting parties exposed to operational and legal risks.

Incorporating AI-specific clauses is important to ensure that AI’s use, acquisition, and application are clearly outlined and agreed upon. AI addendums help with incorporating provisions that should be integrated into current contracts to address important issues such as the utilization of client data for AI training, the inclusion of AI-derived intelligence in deliverables/services, and the governance of AI-enhanced services. In the absence of these provisions in the contracts, service providers and service recipients may encounter uncertainties related to data privacy laws, intellectual property rights, and accountability for outcomes which are driven by artificial intelligence.

This article dives into the relevance of incorporating AI specific provisions in contemporary contracts while relying on AI’s revolutionary potential offering a thorough blueprint for businesses to protect their interests. By taking steps to address these issues contracting parties can establish a more open, secure, and mutually beneficial association in the day and age of AI.

ESSENTIAL PROVISIONS TO CONSIDER IN AN AI ADDENDUM

(1) Requiring Prior Consent to use AI:

· Pro-Customer: It is imperative for customers to incorporate a provision within their agreements that unequivocally mandates vendors to secure prior written consent before engaging in the utilization of artificial intelligence (AI) tools in the execution of services. The inclusion of such a provision serves to preempt vendors from unilaterally deploying AI tools in a manner that could potentially influence or alter the customers’ data processing methodologies or business operational models.

Example Clause: “Vendor shall not incorporate, use, or make AI features available in the performance of the Services or in any Deliverables provided to Customer without obtaining Customer’s prior written authorization.”

· Pro-Vendor: Vendors should ensure that their agreements provide flexibility in utilizing artificial intelligence tools while maintaining transparency with customers. A well-drafted provision should acknowledge the vendor’s right to integrate AI technologies as part of its service delivery, emphasizing efficiency, scalability, and innovation. At the same time, the provision can outline a notification mechanism rather than requiring prior consent, thereby preventing unnecessary delays while assuring customers that AI usage will align with industry standards and regulatory requirements. This approach allows vendors to leverage AI advancements without restrictive approvals while fostering trust and collaboration with customers.

Example Clause: “The Customer acknowledges and agrees that the Vendor may leverage AI models in the provision of Services and Deliverables to enhance efficiency and accuracy. The Customer may opt out of AI-generated outputs upon written request, subject to reasonable adjustments in cost and timeline.”

“Where AI is used to optimize performance, the Customer agrees that such integration is a standard industry practice. The Vendor shall notify the Customer of AI usage but is not required to obtain specific consent unless the AI materially alters the agreed-upon scope of Deliverables.”

(2) Data Ownership and Usage Rights:

· Pro-Customer: The Customer should retain ownership of their data, with clear limitations on how vendors can use it, which is why clearly defining data ownership is crucial. The provisions should also address the outputs generated by AI systems to protect customer interests. While AI systems require significant data for effective operation, it is essential to ensure that customers retain ownership of both their data and any AI-generated outputs to prevent misuse.

Example Clause: “All data provided by Customer to Vendor (“Customer Data”) and all outputs generated by the AI system based on Customer Data (“Output Data”) are Customer’s Confidential Information. Vendor shall have no rights to use, disclose, or distribute Customer Data or Output Data except as necessary to provide the services under this Agreement.”

· Pro-Vendor: For AI-driven services, vendors benefit from retaining certain rights to process and utilize data to enhance their AI models and improve service offerings. Granting vendors a limited, non-exclusive license to use customer data, while ensuring anonymity and compliance allows them to refine their algorithms, optimize efficiencies, and provide better long-term value to customers. A well-drafted clause should protect the vendor’s ability to innovate while addressing customer concerns regarding proprietary or sensitive data.

Example Clause: “The Customer grants the Vendor a non-exclusive, royalty-free license to use, process, and analyze data generated through the Services to enhance AI models, improve service offerings, and develop aggregated and anonymized insights, provided that no Customer-identifiable information is disclosed or used for purposes beyond the scope of this Agreement.”

(3) Intellectual Property Rights:

· Pro-Customer: Customers leveraging AI-driven services should ensure that any intellectual property (IP) generated from the vendor’s services, particularly any custom AI models, training datasets, or outputs specific to their business, remains their exclusive property. This protects the customer from potential loss of control over proprietary processes, trade secrets, or competitive advantages embedded within the AI outputs. A robust IP clause should clarify ownership of AI-generated results and restrict vendors from claiming rights over customer-specific developments.

Example Clause: “Any intellectual property, including but not limited to AI-generated outputs, customized algorithms, models, and datasets, developed specifically for or derived from the Customer’s proprietary information shall be owned solely by the Customer. The Vendor shall have no rights, title, or interest in such intellectual property, except as expressly permitted under this Agreement.”

· Pro-Vendor: Vendors developing AI-based services should ensure they retain ownership of their proprietary AI models, training datasets, and underlying algorithms, even when providing customized solutions to customers. This safeguards their ability to reuse core technologies across multiple clients and maintain a competitive edge. A well-structured clause should grant the customer a license to use AI-generated outputs while explicitly preserving the vendor’s ownership of underlying technology and methodologies.

Example Clause: “The Vendor retains all rights, title, and interest in and to its pre-existing intellectual property, including but not limited to AI models, training data, algorithms, and methodologies used in delivering the Services. The Customer is granted a limited, non-exclusive, non-transferable license to use the AI-generated outputs strictly for its internal business purposes, subject to the terms of this Agreement.”

(4) Model Training with Customer Data:

· Pro-Customer: Customers should ensure that vendors do not use their data, workflows, or AI-generated outputs to enhance or train AI models without explicit permission. Unrestricted use of customer data for AI training can lead to unintended competitive risks, data security concerns, and loss of proprietary advantages. A well-defined clause should mandate vendors to obtain prior written consent before utilizing customer data for AI training and impose strict limitations on data retention and reuse.

Example Clause: “The Vendor shall not use, process, or incorporate the Customer’s data, workflows, or AI-generated outputs for training, fine-tuning, or enhancing any AI models without the Customer’s prior written consent. Any permitted use shall be subject to strict data security measures, and the Vendor shall ensure that no identifiable or proprietary information of the Customer is retained or reused beyond the agreed purpose.”

· Pro-Vendor: Vendors providing AI-based services often require continuous model improvement to enhance performance, accuracy, and efficiency. Retaining the ability to use customer data for AI training (with necessary safeguards) enables vendors to deliver better AI-driven solutions. A pro-vendor clause should allow reasonable use of customer data for AI training while ensuring compliance with privacy, security, and confidentiality obligations.

Example Clause: “The Customer acknowledges that AI models require continuous learning and enhancement. The Vendor may use de-identified and aggregated data derived from the Customer’s usage of the Services to improve, refine, and develop its AI models, provided that such use does not include personally identifiable information or confidential business data of the Customer. The Vendor shall ensure compliance with applicable data protection laws and security measures in such processes.”

(5) Right of Review

· Pro-Customer: Customers should have visibility into how AI is used within the services they procure. A right of review allows customers to assess whether AI tools align with their compliance, ethical, and operational standards. This helps mitigate risks related to bias, data security, and unintended business impacts. A well-defined clause should grant customers the ability to audit, review, or request explanations regarding AI’s role in processing their data or delivering outputs.

Example Clause: “The Customer shall have the right to request, at reasonable intervals, documentation or explanations regarding the AI tools used by the Vendor in the provision of Services. The Vendor shall provide sufficient details to enable the Customer to assess compliance with agreed standards, including data security, accuracy, and ethical considerations. If any AI implementation materially impacts the Deliverables, the Customer may request modifications or alternative approaches.”

· Pro-Vendor: Vendors developing AI-powered solutions need flexibility in their processes without excessive oversight. While transparency is important, unrestricted customer review rights can lead to operational inefficiencies and disclosure of proprietary methodologies. A pro-vendor clause should limit reviews to reasonable requests, ensuring that proprietary AI algorithms and trade secrets remain protected.

Example Clause: “The Vendor shall, upon the Customer’s reasonable written request, provide a high-level summary of the AI methodologies applied in delivering the Services, subject to confidentiality and trade secret protections. The Customer acknowledges that the Vendor’s AI models, algorithms, and optimization techniques are proprietary, and any review rights shall not extend to the disclosure of Vendor’s confidential methodologies, source code, or proprietary technology.”

(6) Some Mutual Clauses

In some areas, clear boundaries of obligations can be specified in the contract but some areas like compliance with law, internal data management policies, remains a mutual obligation for the parties. In these areas, well balanced mutually applicable clauses will be beneficial for the parties.

Example Clause:

Compliance with law: “The Parties shall comply with all applicable laws, including but not limited to data protection regulations such as DPDPA, CCPA, GDPR, intellectual property laws, and industry-specific standards. Both Parties agree to cooperate in maintaining compliance and to promptly address any legal or regulatory changes that may impact the provision or use of AI features.”

Use of AI Policy: “The Parties shall implement and maintain policies for the ethical and responsible use of AI features. These policies must promote transparency, mitigate bias, and ensure fairness and accountability in all applications of AI features under this Agreement.”

Ethical Use of AI: “Both Parties acknowledge the importance of ensuring that artificial intelligence tools used in the performance of this Agreement adhere to ethical standards, including but not limited to fairness, transparency, accountability, and compliance with applicable laws and regulations. The Vendor warrants that any AI utilized in the provision of Services shall not knowingly incorporate biased, discriminatory, or harmful outputs. The Customer agrees to use any AI-assisted Deliverables responsibly and in a manner that does not promote unethical or unlawful practices.”

CONCLUSION

Organizations ought to alter their contracts in order to address the specific dangers and avenues posed by AI technology as AI becomes an increasingly essential component of vendor’s services. Including a carefully written AI addendum in vendor contracts is one efficient method of handling these complications. As a precaution, an AI addendum makes sure that clients and service providers agree on important matters pertaining to the application of AI.