AI and Contracts: Why You Need Waiver and Limitation of Liability Provisions for AI Tools

If your business develops, licenses, or integrates AI tools (in software, content generation, or automated services, for example) your contracts need to address risk head-on. That starts with clear waiver and limitation of liability provisions specifically tailored for AI-driven uncertainty.

Many developers and SaaS platforms assume their standard terms are enough. But AI creates new legal exposure: false outputs (“hallucinations”), misused data, unpredictable learning behaviors, and regulatory unknowns. Without contract language to set boundaries, you’re taking on more risk than you probably intend.

This article breaks down why AI liability is different, how waivers and limitations can help, and what to include in your Terms of Service (TOS), End User License Agreement (EULA), or business contracts.

Why Is AI Risk Harder to Control?

Unlike static code, AI outputs are dynamic, probabilistic, and often non-transparent. Whether you’re using generative models (like LLMs or image generators) or predictive analytics, you’re introducing an element of uncertainty that can’t always be controlled or anticipated.

Some real-world examples:

• A content platform using AI to generate marketing copy is sued for plagiarism.
• A real estate SaaS tool trained on biased data is accused of housing discrimination.
• A financial chatbot gives incorrect tax advice, leading to user penalties.

In each case, the AI doesn’t act maliciously, but the consequences land squarely on the business. Courts have been slow to define where liability stops, and until then, contract language is your best shield.

What’s the Difference Between a Waiver and a Limitation of Liability?

Waivers are contractual provisions where one party voluntarily relinquishes a known right—usually the right to make certain claims. They’re often used to reduce exposure to negligence claims or reliance on specific outputs.

Limitations of liability, on the other hand, cap the amount or types of damages a party can recover under the contract. These are essential when outputs are automated, unpredictable, or delivered at scale.

For AI providers and integrators, the two work together:

• Waivers protect against unreasonable user reliance on AI-generated content.
• Limitations protect against large-dollar liability if something goes wrong.

What Should AI Waiver Language Cover?

When drafting a waiver specific to AI-generated outputs, focus on disclaiming:

1. Reliance on Results: State clearly that AI outputs are informational only and not guaranteed accurate or complete.
2. Human Review Requirements: Place responsibility on the user to verify AI-generated outputs before relying on them.
3. Unsupervised Learning Risks: Acknowledge that the system may generate unexpected or biased content based on evolving training data.
4. Third-Party Model Limitations: If you’re using APIs from companies like OpenAI, clarify that you don’t control their models or updates.

Example:
“Client acknowledges that AI-generated content provided through the Service may contain inaccuracies or errors, and agrees not to rely on such content without independent verification.”

How Should You Limit Liability for AI Tools?

An effective limitation of liability clause should:

• Cap damages (e.g., to the amount paid in the last 12 months)
• Exclude certain types of damages (e.g., consequential, incidental, or punitive)
• Disclaim warranties, including fitness for a particular purpose or accuracy of results
• Clarify use cases that are unsupported (e.g., medical, legal, or financial decision-making)

Example:
“The Service is provided ‘as is’ without warranties of any kind. In no event shall Provider be liable for any indirect, incidental, special, or consequential damages arising from use of AI-generated content.”

Keep in mind that limitations must still be reasonable and enforceable under state law. Courts often reject blanket waivers for gross negligence or willful misconduct, so don’t overreach.

What About Enterprise Clients or Resellers?

If you offer AI functionality through enterprise agreements or licensing deals, you’ll need to:

• Use tailored limitation language in your MSAs or SLAs
• Indemnify yourself against misuse of AI
• Exclude liability for downstream use or redistribution

Enterprise clients often demand negotiation over these provisions. A balanced approach is key—one that allocates risk fairly based on how your product is used and monetized.

How Are Courts Treating AI Liability So Far?

There’s little direct precedent, but the early trend is cautious. For example:

• J.L. v. OpenAI (2023): A defamation suit over ChatGPT-generated content raised the question of whether platforms are responsible for AI hallucinations. The court dismissed the claim on Section 230 grounds but noted open questions about AI “publisher” liability.
• GitHub Copilot lawsuits: Ongoing copyright infringement claims allege that generative AI code tools reused protected code without attribution. If successful, these could reshape how liability is assigned to AI training and outputs.

The takeaway? Courts haven’t settled the rules, but contract language still governs most business-to-business and platform-user relationships. If your terms are silent, you’re vulnerable.

What Can You Do Today to Reduce AI Contract Risk?

1. Audit your agreements: Look at your TOS, EULA, and any active customer/vendor contracts. Are AI-generated outputs mentioned? Are liability caps appropriate?
2. Add disclaimers and waivers specific to AI functionality.
3. Create internal review policies for when to escalate legal review of high-risk deals or enterprise requests.
4. Consult with an IP/tech attorney familiar with AI risk allocation.

Conclusion: Don’t Let AI Innovation Become Your Legal Liability

AI is a powerful business tool—but it’s also a legal wildcard. If your company builds or deploys AI, your contracts must evolve with the technology.

At Daniel Ross & Associates LLC, we help SaaS providers, developers, and data-driven businesses craft modern contract frameworks, including AI-specific waiver and limitation language. We can review your TOS, tighten your disclaimers, or craft best practices AI-focused contracts with built-in indemnity terms.

Make sure your innovation doesn’t become your liability. Schedule a consultation today and let’s build a future-proofed business together.