AI clauses in contracts: 6 clauses you must not miss

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Why an AI contract is not just a “software contract”

Every day, businesses sign agreements to use AI without understanding what they are agreeing to. They think it is like any SaaS agreement, but it is not. AI systems are trained on your data, may produce findings that are hard to challenge, and make decisions whose consequences can reach a court. The contract you sign decides who is responsible when things go wrong.

Israeli law still has no dedicated AI law. The Contracts (General Part) Law, 5733-1973, is the basis, and section 25 of the Law sets the rules of interpretation: a business contract made or renewed from 7 January 2026 that sets no provisions on interpretation will be interpreted according to its wording alone, unless the wording alone leads to an unreasonable result, or a contradiction arises between its provisions. A standard-form contract, on the other hand (and an AI supplier’s standard terms of use are usually a standard-form contract), will be interpreted according to the intention of the parties, even if it provides otherwise (section 25(a)(4)). When a contract is open to different interpretations, the interpretation against the party that had the upper hand in shaping its terms is preferred (section 25(b1)). In the AI field, where every word can be a technological minefield, ambiguity is a risk for both parties.

Clause 1: defining “the artificial intelligence”: no room for mix-ups

The term “AI” in a contract without a definition opens the door to a dispute. A supplier can argue that it committed to an average algorithm, while you expected an advanced language model. Before signing, demand a definition that specifies: the type of system (language model, computer vision, classification, etc.), whether it is a pre-trained model or custom development, and which versions of the product are included in the agreement.

When a technological term is not defined, the dispute will be decided under the rules of interpretation in section 25 of the Contracts Law and the duty of good faith in performing the contract (section 39), but a ruling that comes after the damage has already been done does not help the business much.

Clause 2: who owns the data and the model

This is the most disputed question in AI contracts, and most parties are not aware of it. When an AI supplier trains its system on your data (transactions, conversations with customers, internal documents), who owns the “knowledge” accumulated inside the model?

The Copyright Act, 5768-2007, protects original works. The raw data usually belongs to its owners, but “the trained model” may be a separate work. Under section 34 of the Act, the employer is the first owner of the copyright in a work that its employee created for the purpose of their work and in the course of it, unless agreed otherwise. In a work commissioned from an outside supplier, the rule is the reverse: under section 35, the first owner is the author (in practice, the supplier), unless the commissioning party and the author agreed otherwise, expressly or by implication.

The clause must define: who owns the raw data, who owns the trained model, what the supplier may do with your data (including training other models), and what happens to the rights if the contract ends.

Clause 3: limitation of liability: who pays when the AI gets it wrong

AI systems produce errors. A wrong forecast, a failed recommendation, or a “hallucination” that led to a bad business decision: who is liable? The Torts Ordinance [New Version] sets liability for negligence, but in commercial contracts it can be limited, up to a certain point.

The limitation of liability clause must include: a financial liability cap (usually a multiple of the fees under the agreement), an express list of damages that are not covered (indirect damage, loss of reputation, loss of profits), and an insurance mechanism if the potential damage is high. Reliance on an exemption clause is also examined under the duty of good faith in exercising a contractual right (section 39 of the Contracts Law); and in a standard-form contract, a sweeping exemption is a term presumed to be unfair (section 4(1) of the Standard Contracts Law, 5743-1982), and an exemption from liability for bodily injury or for a malicious act is void (section 5(b)).

Clause 4: confidentiality and privacy: processing personal information

If the AI system processes personal information (of employees, customers, suppliers), the Protection of Privacy Law, 5741-1981, applies regardless of what the contract says. The Protection of Privacy Regulations (Data Security), 5777-2017, set different security levels according to the type of information, the number of people in the database and the number of authorized users, and regulation 15 requires an agreement with a supplier that is given access to the database to set the information it may process and its purposes, how the security duties are implemented, and the return and destruction of the information at the end of the engagement.

The clause must include: a clear definition of what “confidential information” and “personal information” are in the specific context; a duty to report a security incident within a defined time; defining the supplier as a “holder” of the database, an outside party that processes information on behalf of the controller (section 3 of the Protection of Privacy Law) and is also responsible for data security (section 17); and an express prohibition on using the customer’s data to train models of third parties. Israeli companies that receive data from Europe also need to add a DPA clause in line with the GDPR.

Clause 5: performance warranties and service level

AI suppliers like to include “as-is” clauses: the system is supplied as it is, without warranties. In contracts between businesses, this is legal. But a customer who pays six figures a year expects something concrete, and if they did not write it into the contract, they will get nothing.

Demand: a defined SLA with minimum availability (uptime), a minimum level of accuracy and a mechanism for checking it, a version-update policy and an advance notice protocol before changes, and technical support with defined response times. What is not set in the contract will be decided, if at all, by the practice between the parties or the usual practice in contracts of the same type (section 26 of the Contracts Law), and not by your expectations.

Clause 6: what happens to the data when the contract ends

This is where the quietest problem hides. Most people do not think about it while the engagement is running, and then discover that their data continues to sit with the supplier after the agreement has ended.

The clause must set: a defined deletion date for all the data (30–90 days is reasonable), a right to receive a full copy of the data before deletion, written confirmation that the deletion was carried out (including backups), and an express prohibition on keeping derivatives of the data (including features extracted for training a model). The Protection of Privacy Law does not give a general right to deletion on demand: section 14 allows a request to correct or delete only information that is not correct, complete, clear or up to date. So the duty to delete at the end must be set in the contract, and regulation 15(a)(2)(d) of the Data Security Regulations does indeed require an agreement with a supplier that is given access to the database to include how the information is returned and destroyed.

Frequently asked questions

Who owns an AI model that the supplier trained on the company’s data?

Whatever the contract says. The raw data usually belongs to its owners, but “the trained model” may be a separate work, and in a work commissioned from an outside supplier, the first owner of the copyright is the author (in practice, the supplier), unless agreed otherwise (section 35 of the Copyright Act). So the contract must set who owns the data and the model, and what the supplier may do with the data.

Can an AI supplier exempt itself in the contract from all liability?

Not always. In a standard-form contract (and an AI supplier’s standard terms of use are usually a standard-form contract), a sweeping exemption is a term presumed to be unfair (section 4(1) of the Standard Contracts Law), and an exemption from liability for bodily injury or for a malicious act is void (section 5(b)). Reliance on an exemption clause is also examined under the duty of good faith in exercising a contractual right (section 39 of the Contracts Law).

An AI supplier processes the personal data of the company’s customers. What must the agreement with it include?

Regulation 15 of the Protection of Privacy Regulations (Data Security) requires an agreement with a supplier that is given access to the database to set the information it may process and its purposes, how the security duties are implemented, and the return and destruction of the information at the end of the engagement. The Protection of Privacy Law applies to the processing regardless of what the contract says.

What happens to the company’s data held by the AI supplier when the contract ends?

Whatever the contract says. The Protection of Privacy Law does not give a general right to deletion on demand (section 14 allows a request to correct or delete only information that is wrong, incomplete, unclear or not up to date), so the duty to delete at the end must be set in the contract: a deletion date, a copy of the data before deletion, and written confirmation that the deletion was carried out.