AI contract review is the use of an AI model to read contracts: it checks the changes that the other side has made against the company's own rules, drafts a reply, and pulls out every date, price and penalty. It is a part of contract lifecycle management (CLM) software.
Two terms come first. The counterparty is the other side of a contract. When the counterparty receives a draft, it sends it back with its changes marked, and this marked-up copy is called a redline. A playbook is the company's written list of terms that it will accept, terms that it will accept only with a senior lawyer's approval, and terms that it will never accept. Before AI, a lawyer read every redline line by line against the playbook. A long contract could take a day.
Consider a software company in Hyderabad that sells its product to a hospital chain on a three-year contract. The hospital's lawyers send back the draft with 14 changes. The AI model reads each change and compares it with the playbook. Most of the changes are small, such as a new address for notices, and the AI marks them as acceptable.
Two changes are not acceptable. The hospital has removed the limit on how much the software company must pay if something goes wrong. The draft had limited this payment to 12 months of fees, and the playbook says that the limit may never be removed. The AI marks this change as not acceptable and drafts a reply that restores the limit. The hospital has also changed the payment period from 30 days to 75 days. The playbook allows up to 60 days. So the AI suggests 60 days and marks the point for the lawyer.
The AI also pulls the key terms out of the contract as data. These are the renewal date of 1 April, a 5% price rise each year, and a penalty: if the software is down for more than 4 hours in a month, the hospital receives a credit of 5% of that month's fee. CLM uses these terms to send reminders later.
A lawyer still checks every mark before anything goes back. An AI model can misread a clause, or state a term that is not in the contract at all, a problem called AI hallucination. So each extracted term links to the sentence that it came from, and the lawyer can check it in a few seconds. The AI does the first reading and the lawyer approves, an arrangement called human in the loop.
The same reading also works on old contracts. Oil companies use it on thousands of leases with landowners, in land management software. Lawyers also ask general legal questions of a legal AI assistant, which answers from laws and court judgments rather than from one company's contracts.