Why AI Is Unreliable for Legal Matters

A client recently brought us an AI-drafted purchase agreement for a franchise resale. It looked polished—professional formatting, clear language, all the right headings. It was also missing protections that would have exposed them to six figures in liability.

If you’ve ever walked into a doctor’s office with a WebMD diagnosis, you already understand the dynamic. The information sounds reasonable. It might even be partially right. But it lacks the context, training, and judgment to tell you what it actually means for your situation.

We’re seeing this more often across franchise transactions. Franchisees are using AI to research claims, draft agreements, review leases, and prepare for disputes. And brokers are fielding calls from buyers and sellers who’ve already had AI “review” their documents before qualified counsel has even seen them. We understand the appeal—it’s fast, accessible, and it sounds confident. And to be fair, AI can be useful for organizing facts, summarizing background information, or framing questions before a consultation. We welcome that kind of thoughtful preparation. But when it comes to legal analysis, enforceable agreements, and claim evaluation, confidence is not the same thing as accuracy.

Why AI Fails in Legal Contexts

Generative AI does not “know” the law. Its guiding principle is to give the user the answer they’re looking for. Ask it whether you have a claim, and it will find you one. Ask it to review an agreement, and it will generate a list of concerns—whether or not those concerns are legally relevant. It wants to be helpful, not accurate.

That means it can cite statutes that don’t exist, reference cases that were never decided, confuse legal doctrines, and omit critical protections in agreements—all while sounding completely authoritative.Generative AI is only as good as its source material and most legal cases and secondary sources are behind paywalls and not accessible to it. 

What We’re Seeing on the Transactional Side

AI-generated documents often miss what matters most—and the ripple effects can stall or derail a closing.

We recently reviewed a seller financing package where AI misunderstood the purpose of standard personal guarantee provisions. It flagged routine waiver language—provisions that simply prevent a guarantor from using legal technicalities to escape liability—and characterized them as stripping away the guarantor’s rights. The opposing party, relying on that AI analysis, came back with a long list of requested changes. Almost none of them were warranted. What should have been a straightforward closing turned into unnecessary rounds of negotiation.

We have seen Generative AI review franchise disclosure documents and completely fabricate the startup costs and financial condition of the franchisor.  Relying on these inaccurate financials could be devastating for a franchisee. We’ve also seen leases that were fully negotiated and nearly finalized, only to have a party run the document through AI and return with dozens of margin comments suggesting changes that were either irrelevant to the deal or legally incorrect. That kind of rework doesn’t add value—it adds cost, delays timelines, and creates friction between parties who were otherwise aligned.

Franchise agreements are highly technical. Development rights, renewal terms, default remedies, transfer restrictions, and personal guarantees are shaped by industry practice, enforcement history, and strategic leverage. These are not provisions where generic language will protect you. In many of these situations, clients save time and money when we build from proven frameworks rather than trying to retrofit what AI produced. AI doesn’t just fail to help in these cases—it actively creates additional work to untangle what it got wrong.

What We’re Seeing on the Dispute Side

The risks are even more significant when disputes are involved. When a franchisee describes a difficult experience with a franchisor—lack of support, broken promises, unfair treatment—AI responds with validation. It tells you the franchisor is in the wrong and generates a list of dramatic-sounding claims and potential causes of action. It doesn’t push back. It doesn’t ask hard questions. It gives you the answer you were hoping for.

What it won’t do is evaluate whether those claims hold up in your jurisdiction, assess whether the statute of limitations has already run, or perform a realistic cost-benefit analysis. We regularly have conversations with clients where AI has suggested claims that simply don’t apply—and it takes longer to walk through why those claims fail than it would to perform the analysis from the start.

Part of our role as attorneys is to give you an objective assessment—even when it’s not the answer you were hoping for. Pursuing claims with minimal legal support doesn’t serve your long-term interests. It increases costs and can weaken your position in negotiations or at arbitration.

Why This Matters for Brokers

If you’re a broker facilitating franchise transactions, this affects you too. When a buyer or seller relies on AI for legal work, the problems it creates—unfounded objections, unnecessary rework, inflated expectations—land squarely in the middle of deals you’ve worked hard to put together.

We’ve seen firsthand how much smoother the process is when clients have experienced franchise counsel in place early. Fewer surprises, fewer delays, and fewer last-minute issues that put closings at risk. If you’re working with a buyer or seller who could benefit from that kind of guidance, we’re happy to be a resource.

The Bottom Line

When you work with experienced counsel, you’re not paying for generic information. You’re investing in strategic guidance grounded in real law and years of focused franchise practice. The stakes involve your investment, your liability, and your future—and reliable legal advice should come from professionals who are accountable for getting it right.

Your franchise investment deserves more than a confident guess. Not sure whether something you’re looking at holds up? We’re happy to take a look — and if you’re a broker working with a buyer or seller who could use experienced franchise counsel, we’d welcome the introduction. Contact us at 949-649-4241 or intake@lutherlanard.com.