Drafting AI Vendor Contracts: The 10 Clauses That Protect Your Business

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Artificial intelligence is no longer a back-office experiment. It powers customer service bots, risk scoring, supply-chain predictions, and more. However, it must be noted that AI vendors are not just typical SaaS providers. They train models on data, may rely on subcontractors, and sometimes operate in opaque ways. That’s why AI vendor contracts need extra safeguards. A standard SaaS agreement often doesn’t address critical issues like model retraining, data ownership, or liability for AI-generated outputs. This article explains the 10 clauses that protect your business and the negotiation tips to secure them.

  1. Data Rights and Ownership

What to Cover

  • Input Data: Who owns and controls the data you feed into the AI system.
  • Output Data: Who owns model outputs, insights, or recommendations.
  • Derived Data: Whether the vendor can use your data to retrain its models or develop other products.

Why It Matters

Unclear data rights can lead to privacy breaches, loss of competitive advantage, or even regulatory penalties under laws like the GDPR, CCPA/CPRA, or sector rules like HIPAA.

Negotiation Tip

Include a clear provision stating that your business retains ownership of input and output data and restrict vendor use of data for purposes beyond the contract without express consent.

  1. Confidentiality and Security

AI vendors may process highly sensitive data. Contractual confidentiality obligations should extend beyond standard NDAs to include:

  • Security measures aligned with ISO/IEC 27001 or NIST CSF.
  • Breach notification timelines that meet or exceed statutory requirements.
  • Rights to audit or receive SOC 2 reports.
  1. Service Level Commitments (SLAs)

What to Specify

  • Availability & Uptime: Target percentages (e.g., 99.9% uptime).
  • Response & Resolution Times: For incidents or model performance degradation.
  • Maintenance Windows: Advance notice of downtime.

Why It Matters

AI outages can disrupt critical processes like fraud detection or customer support. Vendors should be financially incentivized to meet SLAs (service credits or termination rights).

  1. Performance & Accuracy Warranties

Unlike traditional software, AI systems produce probabilistic outputs. Contracts should address:

  • Minimum accuracy thresholds or performance metrics.
  • Vendor obligations to retrain or adjust models if performance dips.
  • Exclusions for factors outside the vendor’s control (e.g., data quality).
  1. Liability Allocation

Key Issues

  • Indemnities: Vendor should indemnify you for third-party IP infringement, data breaches, or regulatory violations caused by their AI.
  • Limitation of Liability: Cap vendor’s liability, but carve out exceptions for breaches of confidentiality, data security, or IP infringement.
  • Consequential Damages: Consider whether lost profits from AI errors should be recoverable.

Negotiation Tip

It is recommended to push for mutual indemnities and “super caps” for critical risks (e.g., privacy, security breaches).

  1. Compliance With Laws and Ethical Standards

AI vendors must comply with all applicable laws, including privacy statutes, export controls, and emerging AI regulations. Include representations and warranties that:

  • The vendor will comply with current and future AI regulations (e.g., EU AI Act, U.S. state AI laws).
  • The vendor will maintain an AI governance framework and conduct risk assessments.
  1. Transparency and Audit Rights

You need visibility into how the AI system works, especially for high-risk uses. Include:

  • Disclosure of training data sources (at least categories).
  • Model cards or documentation describing intended uses and limitations.
  • Rights to audit or receive third-party audit reports on model fairness and security.
  1. Intellectual Property (IP) Rights

Clarify:

  • Ownership of custom models, prompts, or fine-tuning done under your contract.
  • Restrictions on vendor’s use of your trademarks or brand in marketing.
  • License scope for your users versus vendor’s broader customer base.
  1. Termination, Exit, and Data Return

AI contracts should specify:

  • Your right to download data and model artifacts upon termination.
  • Vendor obligation to delete or destroy your data after contract ends.
  • Transition assistance if you move to another provider.
  1. Dispute Resolution & Governing Law

It is recommended to choose the governing law and venue suited to your business so consider the following items:

  • Determine which jurisdiction’s laws should be applied if there is a legal dispute (e.g., California law)
  • Arbitration vs. court litigation
  • Confidentiality of disputes to protect trade secrets
  • “Step” clauses requiring negotiation or mediation before litigation

Negotiation Strategies for AI Vendor Contracts

  1. Prepare a Risk Matrix: List the potential risks—data leaks, performance failures, regulatory fines—and rank them. Use this to prioritize which clauses to negotiate hardest.
  1. Leverage Due Diligence: Ask for the vendor’s security certifications, bias audit reports, or AI governance policies up front. This gives you leverage.
  1. Use Benchmark Language: Reference widely accepted standards (ISO/IEC 42001 for AI management systems, NIST AI RMF, SOC 2) to avoid reinventing the wheel.
  1. Don’t Accept “We Can’t Change Our Terms”: Even SaaS-like AI vendors will often negotiate for enterprise deals, especially on data rights and liability.
  1. Build Flexibility for Future Regulations: Include a clause allowing contract amendments if AI laws change, so you’re not locked into non-compliant terms.

Conclusion

A well-drafted AI vendor contract is your best defense against data misuse, performance failures, and regulatory surprises. By locking down data rights, liability, and service levels, and by negotiating from a clear risk-based position, businesses can harness AI innovation without losing control or exposing themselves to undue risk. Do you need help reviewing or negotiating an AI vendor contract? Our artificial intelligence and privacy legal team can audit your agreements and help secure terms that protect your data, reputation, and bottom line. Please visit our law firm’s website on www.atrizadeh.com for more information.