Your AI contract generator spat out a 12-page SaaS agreement in 90 seconds. It looks complete. It has all the headings. Then your counsel reads the indemnification clause and flags it as circular—the buyer indemnifies the vendor for losses arising from the vendor's own negligence. The termination section says either party can exit with 30 days' notice but doesn't say what happens to already-rendered services. The limitation of liability caps damages at "annual fees paid," except it doesn't specify which party's fees or which annual period. These aren't edge cases. They're the default output of most LLM-powered contract drafting. The model has seen thousands of real contracts, but it hallucinates specificity where it should hedge, oversimplifies where it should layer conditions, and sometimes produces internal contradictions that slip past a speed reader but crater under counsel review. The problem isn't that AI can't draft contracts. It's that AI excels at plausible-sounding boilerplate but fails catastrophically at liability—the one part of a contract that actually matters when things go wrong. Here are the seven clauses AI routinely butchers, and the checklist your counsel should use to catch them before signature. 1. Indemnification: Who actually pays when someone sues? AI almost always drafts indemnification backwards or circular. The most common failure: the indemnifying party (the one paying) ends up indemnifying the other party for the other party's own negligence. Real example from tested prompts: "Vendor shall indemnify Client against all third-party claims arising from the Services, including claims arising from Client's use of the Services in violation of applicable law." Read that twice. Vendor indemnifies Client for claims arising from Client's own illegal use of the Services. That's backwards. Client should indemnify Vendor for losses caused by Client's misuse. Vendor should indemnify Client only for claims arising from Vendor's breach or negligence in providing the Services. Red flags your counsel should spot: Indemnification that includes the indemnifying party's own negligence, breach, or violation of law (should be excluded unless the contract explicitly and separately addresses it) Lack of a "sole remedy" or "exclusive remedy" statement that ties indemnification to the process for claiming it No trigger mechanism ("upon written notice", "within 30 days") for the indemnified party to notify the indemnifying party No control clause (who decides defense strategy?) Indemnification applies to "all claims" without carving out IP infringement, data breach, or other specific liability 2. Limitation of Liability: The dollar cap that doesn't cap anything AI sets a ceiling on damages but leaves ambiguity about what gets measured against it. The most damaging version: "Neither party's total liability shall exceed the annual fees paid under this Agreement." Which annual fees? If the contract has a 12-month initial term and then auto-renews, is the cap the first year, or every renewal year? If services scale, and the vendor underestimated and invoiced ₹5L monthly instead of ₹15L, which figure is the "annual fees"? If the vendor paid no fees, is the cap zero? AI drafts this because it's common boilerplate, but it doesn't resolve the math. Red flags your counsel should spot: Cap defined as "annual fees" without specifying the year or whether it's the first year only or rolling annually No exclusion for indemnification, confidentiality breach, or IP infringement (these often sit outside liability caps) No distinction between direct and indirect damages (caps usually apply to direct only) Cap is zero or undefined if no fees are exchanged (applies to free-tier or evaluation contracts) "Liability shall not exceed" without specifying whether it's per incident, annual, or total 3. Termination for Cause: Vague triggers that don't actually trigger AI loves the phrase "material breach." It almost never defines what "material" means, and it rarely specifies what happens in the interim. "Either party may terminate immediately upon material breach by the other party." Is a one-day late payment material? Is a SaaS uptime miss of 1% over the month material? AI doesn't know, so it doesn't say. Your contract now says either party can walk at their own judgment of "material"—which means no one has a clear exit right until it's already contested. The second failure: no cure period. Counsel always wants one. "Termination for cause is effective only if the breaching party fails to cure within 30 days of written notice." AI often omits this entirely. Red flags your counsel should spot: "Material breach" used without a definition or examples ("e.g., failure to pay for more than 15 days, uptime below 95% measured monthly, or...") No notice requirement ("upon written notice") No cure period ("if not cured within 30 days") Termination "effective immediately" without specifying whether duties end or only the right to continue the