What Are the Risks of Using AI in Legal Practice?

Artificial intelligence offers significant potential benefits for legal practice, but it also introduces risks that lawyers and law firms must understand and manage. From ethical breaches to malpractice claims, from compliance violations to reputational damage, the risks are real and consequential. Australian legal professionals considering AI adoption must approach it with clear-eyed assessment of what can go wrong and how to prevent it.

Professional Ethics and Duty of Competence

The starting point for understanding AI risks is the ethical framework governing legal practice. Australian lawyers are bound by professional conduct rules that do not grant exceptions for technological innovation.

The duty of competence requires lawyers to maintain appropriate knowledge and skills for their practice. This includes understanding the tools they use. A lawyer who adopts AI without understanding how it works, what its limitations are, and what risks it presents is failing in their professional duty.

This is not merely theoretical. If a lawyer uses AI to generate legal research and submits that research without verification, only to discover later that cases were fabricated or principles misstated, ignorance of the AI's limitations is not a defence. The lawyer is responsible for the work product regardless of how it was created.

For Australian firms, this creates an obligation to provide AI training for lawyers. Understanding what AI can and cannot do, how to verify outputs, and when AI is inappropriate must be part of professional development programmes. Firms that deploy AI without adequate training expose both the firm and individual lawyers to ethical risk.

Confidentiality and Privilege Breaches

Client confidentiality is a cornerstone obligation of legal practice, and AI creates multiple pathways for breach.

The most obvious risk arises when lawyers input confidential client information into public AI platforms. Services like ChatGPT send data to third-party servers where it may be retained, processed, or accessed in ways incompatible with confidentiality obligations. Even if the AI provider's current policy seems acceptable, those policies can change, and lawyers cannot unilaterally alter their confidentiality duties.

Legal professional privilege adds complexity. Privilege protects communications between lawyers and clients from disclosure. Disclosing privileged information to third parties can waive privilege. While using technology for legal work does not automatically waive privilege, using third-party AI platforms that access and process privileged information creates risk, particularly if that information is retained or accessible to others.

Data breach risks compound these concerns. If an AI platform experiences a security incident and confidential client information is exposed, the law firm is potentially liable even if they did not cause the breach. Choosing to use an inadequately secure platform may itself constitute negligence.

For Australian lawyers working with government clients or in regulated industries, confidentiality obligations may be even stricter. Government agencies often have specific data handling requirements, and breaches can have serious consequences including termination of engagement and reputational damage.

Accuracy Risks and Hallucinations

Perhaps the most publicised risk of AI in legal practice is the generation of inaccurate or entirely fabricated information, commonly called hallucinations.

Large language models like ChatGPT are trained to predict probable word sequences based on patterns in training data. They are not designed to verify factual accuracy or ensure legal correctness. The result is AI that can confidently generate case citations for cases that never existed, misstate legal principles, or provide analysis that is plausible but wrong.

Several cases internationally have demonstrated this risk dramatically. Lawyers have been sanctioned by courts for submitting briefs containing AI-generated fake cases. In one prominent US case, a lawyer relied on ChatGPT for research and submitted a brief citing multiple non-existent cases. The lawyer's defence that he did not know the AI would fabricate cases was not accepted, and sanctions were imposed.

For Australian practitioners, the lesson is stark. Using AI that is prone to hallucinations without rigorous verification is professional malpractice waiting to happen. If inaccurate AI-generated work leads to poor advice, missed legal arguments, or failed representation, the lawyer and firm are liable.

The subtler risk is that AI may provide information that is not entirely wrong but is incomplete, outdated, or contextually inappropriate. These errors may be harder to detect than outright fabrications but can be equally damaging to client interests.

Liability and Malpractice Exposure

AI use creates multiple pathways to professional liability that Australian firms must understand and mitigate.

Professional negligence claims arise when lawyers fail to meet the standard of care expected of reasonably competent practitioners. Using AI that produces unreliable outputs without adequate verification falls below that standard. If a client suffers loss because of AI-generated errors, the lawyer is liable regardless of where the error originated.

Breach of contract claims may arise if engagement terms specify certain standards of work and AI use results in work falling below those standards. Clients who pay for experienced lawyer analysis may not accept receiving AI-generated content with minimal review.

Breach of fiduciary duty claims can result from using AI in ways that prioritise lawyer convenience over client interests. The fiduciary relationship requires lawyers to act in clients' best interests, and using tools that expose client information to unnecessary risk may breach that duty.

The challenge for Australian firms is that professional indemnity insurance may not cover AI-related claims if the insurer considers the AI use to have been reckless or outside reasonable professional practice. This creates potential for uninsured liability exposure, a catastrophic risk for any law firm.

Regulatory and Compliance Risks

Australian legal practice operates within a complex regulatory framework, and AI creates numerous compliance risks.

Privacy law compliance is fundamental. The Privacy Act 1988 (Cth) requires organisations handling personal information to protect it appropriately and to notify individuals if their information will be sent offshore. Lawyers using AI that sends client data to overseas servers must comply with these requirements, including obtaining consent and providing appropriate notifications.

Professional conduct rules in every Australian jurisdiction require lawyers to maintain confidentiality and act competently. Using AI that compromises confidentiality or produces unreliable work potentially breaches these rules, exposing lawyers to disciplinary action by regulators.

Law society guidance is evolving, with various Australian law societies issuing statements about AI use. Lawyers must stay informed about this guidance and ensure their AI practices comply. As regulators become more aware of AI risks, scrutiny will increase and standards will likely tighten.

Industry-specific regulations create additional layers. Lawyers working in financial services must comply with ASIC requirements, those in healthcare face health privacy obligations, and government lawyers have whole-of-government policies. AI use must accommodate these varied requirements, which consumer AI platforms are not designed to address.

Data Sovereignty and Jurisdictional Risks

Data sovereignty refers to the principle that data is subject to the laws of the jurisdiction where it is stored. For Australian lawyers, data sovereignty is both a legal requirement and a risk management imperative.

When client data is sent to AI platforms operating offshore, that data becomes subject to foreign laws. US-based AI platforms fall under the CLOUD Act, which requires US companies to provide data to US authorities regardless of where the data is stored. This means Australian client information could be accessed by foreign governments without Australian legal process.

For clients in sensitive matters, including government clients, clients in national security industries, or clients with valuable commercial information, this loss of data sovereignty is unacceptable. Australian lawyers have a duty to protect their clients' interests, which includes ensuring data is not subject to foreign jurisdiction without clear necessity and client consent.

Cross-border data transfer obligations under privacy law require appropriate safeguards when personal information is sent overseas. Many standard consumer AI platforms do not provide the safeguards that would satisfy these obligations for the type of sensitive personal information lawyers handle.

The practical risk is that lawyers may be breaching both their professional obligations and privacy law by using offshore AI platforms, even if no harm has yet materialised. The breach exists in the exposure to risk, not just in adverse outcomes.

Bias and Discrimination Risks

AI systems can perpetuate or amplify biases present in their training data, creating risks for legal practice.

If AI used for legal research or analysis was trained primarily on cases from particular jurisdictions, it may not appropriately account for Australian legal principles or may reflect biases in the training data. This could lead to inappropriate advice or missed arguments.

In litigation, AI used for outcome prediction or case assessment may reflect historical biases in judicial decision making. While understanding historical patterns can be valuable, uncritically relying on AI that reflects systemic biases could perpetuate discrimination.

In recruitment or performance assessment, firms using AI must be careful to avoid discrimination. AI trained on historical data may learn to favour candidates or lawyers with characteristics that reflect past preferences rather than actual merit or capability.

Australian anti-discrimination law applies regardless of whether discrimination results from human decision making or AI-mediated processes. Firms cannot excuse discriminatory outcomes by blaming the AI.

Transparency and Explainability Challenges

Legal work requires transparency and the ability to explain reasoning. AI systems, particularly large language models, often operate as opaque systems that challenge these requirements.

Lawyers must be able to explain to clients, courts, and regulators how they reached conclusions or developed strategies. If AI contributed to that work, and the lawyer cannot explain how the AI reached its outputs, this creates problems. Courts may reject AI-assisted analysis if it cannot be explained and verified.

Audit and review processes within firms require transparency about how work was conducted. If AI use cannot be adequately documented and explained, this undermines quality control and risk management.

Professional responsibility requirements assume lawyers understand and can justify their work processes. Opaque AI that produces outputs without clear reasoning chains challenges this fundamental expectation.

The risk is that lawyers may find themselves unable to defend work they have done because they cannot explain or justify the AI component. This exposure is unacceptable for professional practice.

Reputational and Market Risks

Beyond legal liability, AI risks extend to firm reputation and market position.

Client trust is fundamental to legal practice. If clients learn their confidential information was processed by consumer AI platforms or that their legal advice was AI-generated without adequate oversight, trust can be severely damaged. High-value clients expect and pay for experienced lawyer judgment, not lightly reviewed AI outputs.

Market reputation can be damaged by AI-related incidents. Firms that experience confidentiality breaches from AI use, submit AI-generated fabrications to courts, or become known for cutting corners with inappropriate AI may find their reputation in the market seriously harmed.

Regulatory scrutiny increases following AI-related incidents. Firms that experience problems may face detailed investigations, public reporting of disciplinary outcomes, and long-term reputational consequences.

Competitor advantage flows to firms that implement AI responsibly. While inappropriate AI use creates risks, thoughtful AI adoption creates benefits. Firms that avoid AI entirely may find themselves at a competitive disadvantage to firms that adopt appropriate legal AI effectively.

Mitigation Strategies: Managing AI Risks Effectively

The existence of risks does not mean avoiding AI entirely. It means implementing appropriate risk mitigation strategies.

Choose appropriate tools designed for legal practice rather than consumer AI platforms. Purpose-built legal AI addresses the confidentiality, accuracy, and compliance requirements that general tools ignore. This single decision eliminates many of the most serious risks.

Implement robust governance frameworks before deploying AI. Clear policies about what AI can be used for, what safeguards are required, and what verification protocols apply provide structure and accountability. Governance frameworks should address data handling, accuracy verification, client consent, and documentation requirements.

Provide comprehensive training for all lawyers using AI. Training should cover how AI works, what its limitations are, when it is appropriate or inappropriate, and how to verify outputs. Training should include practical examples and be updated as technology and guidance evolve.

Establish verification protocols proportionate to risk. High-stakes work like advice to clients or submissions to courts requires thorough verification. Routine work like initial research or document drafting may require less intensive checking, but verification should never be eliminated entirely.

Obtain appropriate consent from clients where AI will process their confidential information. Clients should understand what AI will be used, how their data will be handled, and what safeguards are in place. Informed consent protects both the client relationship and the firm's position if questions arise.

Conduct regular risk assessments as AI use evolves. What was appropriate when AI was used for limited purposes may become inadequate as use expands. Regular review ensures governance keeps pace with practice.

Maintain comprehensive documentation of AI use, including what tools are used, for what purposes, what verification is conducted, and what outcomes result. Documentation supports accountability, enables continuous improvement, and provides evidence of responsible practice if questioned.

The Role of Private AI in Risk Mitigation

Many of the risks associated with AI in legal practice stem from using tools not designed for professional use. Private AI platforms purpose-built for legal work address these risks systematically.

Data sovereignty is assured when AI operates entirely within Australian jurisdiction. Client data remains subject to Australian law, eliminating the foreign access and cross-border transfer risks of offshore platforms.

Confidentiality is protected when AI platforms are designed not to retain or train on client data. Purpose-built legal AI processes information for the specific task and then handles it according to agreed policies, maintaining confidentiality throughout.

Accuracy is improved when AI is connected to verified legal databases and designed to provide citations rather than generate unsourced analysis. While verification remains necessary, the starting point is more reliable.

Transparency and auditability are built into legal AI platforms, allowing firms to demonstrate appropriate use and maintain the accountability expected in legal practice.

Compliance with professional obligations becomes manageable when AI is designed with those obligations in mind, rather than forcing firms to adapt consumer tools to professional requirements.

Block Box AI: Risk Mitigation by Design

Block Box AI addresses the risks of AI in legal practice through architecture designed for professional use.

Complete data sovereignty with all processing in Australia eliminates jurisdictional risks and simplifies compliance with privacy and professional obligations.

No training on client data protects confidentiality and privilege while ensuring client information is not repurposed beyond the engagement scope.

Verified outputs connected to authoritative legal databases reduce accuracy risks and provide the citations lawyers need for efficient verification.

Full transparency and auditability enable firms to demonstrate responsible AI use to regulators, clients, and insurers.

Integration with legal workflows means AI that understands Australian legal practice and works within existing processes rather than requiring risky workarounds.

For Australian law firms and in-house legal teams, Block Box AI represents risk mitigation through appropriate tool selection. Rather than trying to manage the inherent risks of consumer AI platforms, firms can adopt AI designed from the outset for legal practice.

Moving Forward: Balancing Innovation and Responsibility

The risks of AI in legal practice are real and consequential, but they are manageable with appropriate approaches.

Australian legal professionals should embrace AI for its genuine benefits while maintaining the professional standards that define the practice of law. This means rejecting inappropriate tools, adopting purpose-built legal AI, implementing robust governance, and maintaining the competence and diligence that clients expect.

The future of legal practice will include AI. The question is whether that AI will be adopted responsibly or recklessly. Australian lawyers have the opportunity to lead the way in responsible AI adoption, demonstrating that innovation and professional responsibility are not opposing forces but complementary values.

For law firm leaders and in-house counsel making decisions about AI adoption, the path forward is clear: understand the risks, implement appropriate mitigation strategies, and choose tools designed for legal work. Block Box AI provides the platform for this approach, offering the benefits of AI without the unacceptable risks of consumer platforms.