AI as a Third Party in Contracts: Understanding the Legal, Privacy, and NDA Risks.

AI as a Third Party in Contracts: Understanding the Legal, Privacy, and NDA Risks

1. The Hidden Legal Challenge: AI as an Unseen Party

Professionals increasingly share confidential data with AI tools like ChatGPT, Claude, Gemini, and others. But few stop to ask: is AI now a third party to our contracts? Traditional contracts define parties as legal entities capable of holding rights and obligations. AI systems, while not legal persons, receive, process, and sometimes reuse information for model improvement. This positions AI as a silent intermediary — an unacknowledged third party without a confidentiality clause or liability.

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2. What Contract Law Says About Third Parties

Contract law rests on the doctrine of privity — only the parties to a contract can enforce or be bound by it. Classic precedents include Tweddle v Atkinson (1861) and Beswick v Beswick (1967), both of which restricted rights of non-parties. Nigeria’s courts and other common-law systems uphold this principle, though reforms like the UK’s Contracts (Rights of Third Parties) Act 1999 introduced exceptions. Yet AI challenges these assumptions — it processes data without being a party, agent, or beneficiary.

3. NDAs and Artificial Intelligence: The Confidentiality Conflict

When confidential data is entered into AI tools, the information may be stored, logged, or even used for training. OpenAI’s 2024 terms allow data usage for model improvement. Google faced lawsuits (J.L. v Alphabet, 2024) for AI training on user content. Clearview AI was fined by regulators in the UK and Canada for using biometric data without consent. These examples prove confidentiality can be breached when AI tools are involved.

4. How AI Tools Handle and Retain Your Data

AI systems often store logs and metadata. Even anonymized data can be re-identified, as shown in Carlini et al. (2023). Employees at AI vendors may have debugging access, exposing sensitive material. Under GDPR, the NDPR, and Nigeria’s Data Protection Act (2023), data must only be used for lawful, specific purposes. If users don’t understand or control retention, consent loses meaning.

5. AI, Privity, and the No-Agency Problem

AI acts like an agent but lacks legal personhood. Users can’t sue the model, and operators often disclaim liability. This creates a “no-agency” zone: the AI operates functionally as a party, but without accountability. Future legal frameworks must redefine responsibility and transparency.

6. Legal Precedents and Real-World Cases

Precedents: Tweddle v Atkinson (1861), Beswick v Beswick (1967), Data General v Digital Computer Controls (1971). Regulatory actions: Clearview AI (2022), J.L. v Alphabet (2024). Frameworks: EU AI Act (2024), Nigeria Data Protection Act (2023). These shape how AI’s role in contracts is evaluated globally.

6. Legal Precedents and Real-World Cases

Precedents: Tweddle v Atkinson (1861), Beswick v Beswick (1967), Data General v Digital Computer Controls (1971). Regulatory actions: Clearview AI (2022), J.L. v Alphabet (2024). Frameworks: EU AI Act (2024), Nigeria Data Protection Act (2023). These shape how AI’s role in contracts is evaluated globally.

7. AI Clauses to Protect Your Confidential Information

Contracts should include specific AI clauses:
– No feeding confidential data into AI systems without written consent.
– Require deletion and audit rights for any AI-processed data.
– Include a Non-Training Warranty: confidential data cannot be used to train AI.
– Add jurisdictional clauses covering AI operator liability.

8. The Data Protection Landscape in Nigeria and Beyond

Nigeria’s Data Protection Act (2023) codifies principles of lawful data processing. Combined with NDPR (2019), it echoes GDPR obligations. Under EU and U.S. reforms, transparency and auditability are key. These frameworks are converging toward mandatory AI accountability — a trend Africa must prepare for.

9. Practical Steps for Businesses and Innovators

  1. Avoid sharing trade secrets or IP with public AI systems.
  2. Ask vendors about retention, access, and training.
  3. Use enterprise AI with ‘no-training’ guarantees.
  4. Insert AI-specific clauses in all NDAs.
  5. Stay informed on AI regulatory developments globally.

10. The Future of Contracts in the Age of AI

Legal scholars predict AI personhood debates will expand. The U.S. Uniform Electronic Transactions Act recognizes electronic agents in contracting. The EU’s draft AI Liability Directive assigns accountability to AI operators. Until legislation matures, private contracts must bridge this gap through foresight.

Conclusion

AI is now an unseen stakeholder in modern business. Every contract must anticipate its role — not as an afterthought, but as a critical participant. Future-proof contracts will treat AI like the digital third party it already is.

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