Artificial Intelligence (AI) has become an integral part of technological progress worldwide, and Malaysia is no exception. The launch of the nation’s first large language model (LLM), ILMU 1.0, by Prime Minister Datuk Seri Anwar Ibrahim marks a milestone in Malaysia’s digital transformation agenda. This momentum extends across industries, including the legal sector, where AI is increasingly being adopted. One of the most notable areas is contract management, where AI is reshaping the different stages involved. This article explores the impact of AI on contract management in Malaysia, focusing on its practical applications, governing legal frameworks and enforcement challenges.
The Role of Artificial Intelligence in Contract Management
Contract Drafting
AI platforms are reshaping contract preparation by automating routine tasks and generating initial drafts from pre-approved templates. This can ensure consistency in structure and language while reducing errors, omissions, and inconsistencies that often arise under time pressure. Beyond standardisation, AI can also adapt agreements to specific transactions by incorporating commercial terms such as payment provisions, delivery schedules, and performance benchmarks, keeping contracts both legally sound and commercially relevant.
While these tools improve speed and consistency, it is essential to note that they do not eliminate the need for professional oversight. The expertise of qualified lawyers remains critical in shaping complex provisions, negotiating sensitive terms, and ensuring that the final contract reflects both the legal protections and the strategic interests of the parties involved.
Contract Review and Analysis
AI review tools streamline contract evaluation by rapidly scanning documents for errors, omissions, and inconsistencies. By using natural language processing (NLP), they can flag unusual terms, highlight contradictions, and detect missing provisions that may create legal or commercial risks. For businesses handling large volumes of agreements, this improves efficiency and helps identify recurring patterns for more consistent documentation.
Even with these capabilities, AI remains a support tool rather than a replacement for professional judgment. While it can highlight potential issues, it cannot determine their significance in the context of a specific transaction or commercial strategy, which is expected of a legal practitioner.
Automated Negotiations
AI can provide support in contract negotiations by analysing terms, suggesting amendments, and offering data-driven insights into possible outcomes. These systems can draw on large sets of historical data to predict negotiation strategies, anticipate areas of contention, and recommend compromise language that balances both parties’ interests. By reducing the number of drafting cycles, businesses can streamline discussions, achieve faster resolutions, and move more quickly toward finalising agreements.
Smart Contracts
AI and blockchain are revolutionising contract execution through smart contracts, which embed obligations directly into code. Once predefined conditions are met, such as delivery confirmation, the system automatically triggers payments or updates records. This reduces reliance on intermediaries, lowers costs, and ensures obligations are met accurately and on time.
However, enforceability depends on demonstrating explicit consent and compliance with statutory requirements. While smart contracts can improve efficiency and transparency, legal practitioners remain key to structuring them correctly and ensuring they align with Malaysian law.
Risk Assessment and Compliance
AI monitoring systems are transforming contract management by providing continuous oversight of obligations and performance. These platforms can track renewal dates, identify missed deadlines, and issue automated alerts for potential breaches, helping businesses reduce the risk of non-compliance. They can also consolidate data across multiple contracts, offering greater visibility and control across an organisation’s portfolio. For companies managing large volumes of agreements, this creates efficiency and ensures that key commitments are not overlooked.
Legal Frameworks Governing AI-Generated Contracts
Malaysian Legislation
Currently, Malaysia does not have AI-specific legislation and relies on existing statutes together with guidelines to guide the responsible use of AI:
- National Guidelines on AI Governance and Ethics (AIGE): The AIGE, introduced by the Malaysian Government in 2024, sets out seven non-binding key principles to promote the responsible and ethical use of AI technologies. It emphasises values such as transparency, accountability, fairness, and human oversight, which are directly relevant to AI contract management. While not legally enforceable, these guidelines serve as a guide for organisations deploying AI and may influence judicial interpretation and future legislative development.
- Contracts Act 1950: The Contracts Act 1950 remains the principal statute governing contractual relationships in Malaysia, providing the framework for determining validity through the elements of offer, acceptance, consideration, and intention to create legal relations. For AI-generated contracts to be enforceable, it must be shown that these elements are satisfied, especially the requirement that human parties have clearly and knowingly consented to the terms
- Electronic Commerce Act 2006: The Electronic Commerce Act 2006 (“ECA 2006”) gives legal recognition to electronic contracts, signatures, and records in Malaysia, ensuring that AI-assisted agreements executed digitally are as valid as traditional contracts. The ECA 2006 requires that electronic signatures reliably identify the signatory and indicate their approval, which supports the integration of AI tools in contract preparation and execution. It also mandates that electronic records be preserved in a secure and accessible form, thereby protecting the integrity of contracts stored on digital platforms. For businesses, this means implementing authentication measures, audit trails, and tamper-prevention safeguards to maintain compliance and trust.
- The Personal Data Protection Act 2010: The Personal Data Protection Act 2010 (“PDPA 2010”) plays a crucial role in AI-driven contract management by regulating how personal data is collected, processed, and stored. Since AI platforms often handle sensitive information, businesses remain accountable under the Act to ensure compliance with the principles contained in the PDPA 2010, particularly in terms of consent, purpose limitation, and data security. As non-compliance may result in penalties and reputational damage, companies must implement safeguards like transparent privacy notices, robust encryption, and strict access controls.
- Intellectual Property Laws: In Malaysia, intellectual property rights are primarily governed by the Copyright Act 1987, Patents Act 1983, Trade Marks Act 2019, and Industrial Designs Act 1996. Collectively, these statutes regulate authorship, ownership, and protection of creative and innovative works across various categories. While these statutes provide clarity where creative works or inventions are created by humans, they do not expressly address content produced by artificial intelligence. As a result, the question of who holds authorship or ownership rights for AI-generated material remains vague under Malaysian law. Until specific legislative guidance emerges, businesses are encouraged to address ownership and usage rights by expressly defining them in their contracts and licensing agreements, thereby safeguarding their commercial and legal interests.
- Public Consultation Paper No.3/2025: Automated Decision Making and Profiling Guideline: In March 2025, Malaysia’s Personal Data Protection Department (“PDPD”) issued a Public Consultation Paper No. 3/2025 on Automated Decision-Making and Profiling (“ADMP”) to consider how ADMP should be regulated within the Personal Data Protection framework. The consultation paper includes proposals for safeguards for contracts involving AI decision-making, including the right to refuse automated outcomes, obtain meaningful explanations, and request human review, particularly where such decisions have legal consequences or significantly affect a party. These considerations are relevant to AI-driven contract management, where automation may determine eligibility, terms, or pricing. Ensuring transparency, accountability, and human oversight in these processes will be essential to uphold fairness and preserve the legal validity of contractual arrangements.
The European Union Artificial Intelligence Act
Malaysia can draw reference from the European Union Artificial Intelligence Act (“EU AI Act”) when developing its legal framework for artificial intelligence to provide a structured approach to addressing liability, safety, and compliance. Adopted in 2024, the EU AI Act is the first comprehensive legislation in the world to regulate AI based on a risk-tiered system, categorising uses into unacceptable, high, limited, and minimal or no risk, with each level subject to different regulatory obligations. This approach demonstrates how regulators can balance between encouraging technological innovation and safeguarding public trust. It should be highlighted that the EU AI Act also has an extraterritorial effect, which means Malaysian entities offering AI services to EU users must comply if their systems influence contracts or decisions within the EU.
Challenges and Ethical Concerns in AI-Generated Contracts
While AI attempts to introduce efficiency, accuracy, and automation into contract management, its adoption also raises significant legal, ethical, and practical concerns:
Data Privacy Risks
One of the foremost challenges in adopting AI for contract management is the handling of sensitive data. AI platforms often process large volumes of business-critical and personal information, raising significant concerns about confidentiality, security, and misuse. In Malaysia, organisations must ensure that such systems comply with the PDPA 2010, which regulates the collection, processing, and storage of personal data.
Without adequate safeguards, businesses risk data breaches or unauthorised disclosures that could harm both corporate reputation and client trust. While AI tools can help monitor compliance, they also create additional vulnerabilities by concentrating data in centralised systems. This highlights the importance of robust cybersecurity measures, legal oversight, and clear accountability structures when utilising AI in contract management.
Liability and Accountability
Another challenge is AI’s inability to understand context and nuances and context that human lawyers bring to contract interpretation. While AI systems are adept at identifying patterns, highlighting inconsistencies, and generating contract terms, they lack the human ability to interpret nuance, intent, cultural and commercial context. This limitation means that AI-generated contracts may inadvertently omit critical provisions or misrepresent the intention of the parties, creating legal and business risks. Accordingly, AI should be treated as an assistive tool rather than a replacement for professional legal advice and judgment.
Accountability is also essential to maintain checks and balances in contract management. To date, many jurisdictions have yet to develop comprehensive regulatory frameworks to govern the use of AI, leaving gaps in how responsibility is allocated when errors or omissions arise. Businesses, therefore, remain fully liable for the outcomes of using AI platforms in their operations, regardless of whether the issue stems from the technology or human oversight. This places the burden of ensuring accuracy, transparency, and compliance on business owners.
This principle was demonstrated in the Canadian case of Moffatt v Air Canada (2024), where a passenger successfully claimed damages after relying on misleading information generated by the airline’s chatbot regarding bereavement fares. The tribunal dismissed the airline’s argument that it was not responsible for the chatbot’s errors, emphasising that businesses are liable for all information presented on their platforms, whether produced by humans or AI. This case illustrates the growing judicial expectation that companies deploying AI must ensure accuracy, transparency, and fair representation in customer interactions, including contracts.
Intellectual Property Concerns
In aspects relating to intellectual property, AI-generated content raises concerns regarding ownership and authorship. When an AI system drafts or amends contractual clauses, the issue arises as to whether ownership belongs to the developer of the AI system, the business using the tool system or the AI itself as a creator. It is therefore essential to establish clear contractual terms to expressly define matters such as copyright ownership, licensing rights, and restrictions on further use of AI-produced materials. By doing so, businesses can ensure that both commercial and legal interests are adequately safeguarded.
Fairness, Bias and Human Rights
The integration of AI into contract management also raises human rights considerations, especially where automated systems influence employment, financial, or consumer-related agreements. When decision-making processes are left entirely to AI, there is a risk that existing societal or historical biases within the data may be reproduced, resulting in discriminatory or unfair outcomes.
For example, an AI system could consistently recommend less favourable terms to smaller businesses or underrepresented groups, thereby undermining the principle of equal treatment before the law. Such practices not only diminish trust but also create barriers to justice and equitable commercial participation. To prevent this, human oversight is essential to ensure that contracts generated or reviewed by AI systems align with principles of fairness, transparency, and fundamental rights.
Enforceability of AI-Generated Contracts in Malaysia
The enforceability of AI-generated contracts in Malaysia remains rooted in the Contracts Act 1950, which establishes the basic requirements of offer, acceptance, consideration, and intention to create legal relations. While AI can streamline the drafting, negotiation, and execution of agreements, enforceability ultimately depends on human parties providing valid and informed consent. This principle means that even where AI tools automate the process, contracts will only be binding if the parties knowingly and voluntarily agree to the terms. As such, AI is and should be treated as an instrument that assists in contract formation, rather than as a replacement for a contracting party.
A relevant comparison arises with smart contracts, which are self-executing agreements coded on blockchain systems. Although Malaysian courts have not yet delivered authoritative judgments on smart contracts, their validity can be inferred through the Electronic Commerce Act 2006, which gives legal recognition to electronic contracts, signatures, and records. If smart contracts are structured to show explicit consent and meet the requirements of the Contracts Act 1950, it is capable of being enforced.
Conclusion
Artificial Intelligence is reshaping contract management, delivering some benefits such as efficiency, standardisation, and automation. However, its adoption also brings legal, ethical, and practical challenges, including concerns over data privacy, liability, and fairness. As AI becomes an unavoidable part of business operations, the focus must shift to adapting responsibly and embedding safeguards that protect parties and ensure compliance.
While AI can streamline drafting and execution, it cannot replace the nuanced judgment and professional responsibility of experienced legal practitioners, whose role remains essential in ensuring contracts are fair, enforceable, and aligned with strategic objectives. If your organisation is considering the use of AI in contract management, our team is ready to guide you through these developments and help ensure your agreements remain future-proof and enforceable.
By Cassandra Thomazios and Mira Mashor
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
