Understanding the Legal Risks of Relying on AI for Decision-Making in SMEs

Small and medium-sized enterprises (SMEs) face intense pressure today. Rising costs, tight staffing, and tough choices about priorities create a challenging environment. In this climate, shortcuts can seem like a quick fix. One shortcut gaining popularity is the use of artificial intelligence (AI) tools to speed up decision-making and reduce costs. Yet, as Sundar Pichai, CEO of Alphabet and Google, recently warned, blindly trusting AI can lead to serious problems. Even the most advanced AI systems make mistakes, and the rapid growth of AI technology is outpacing sensible controls.

This warning should make every SME pause. If the creators of AI caution against overreliance, business owners must consider the risks carefully. This post explores why AI should be treated as a tool, not a decision-maker, and highlights the legal risks SMEs face when they depend too heavily on AI for critical decisions.

AI Is a Tool, Not a Decision-Maker

AI can seem like a magic solution. It promises fast answers and cost savings. But AI does not understand context or nuance the way a human expert does. It generates responses based on patterns in data, which can lead to errors or misleading results.

At Hebborn Consultancy, we regularly see the fallout when SMEs misuse AI. Businesses often turn to AI for legal documents or advice because it appears cheaper and faster. Unfortunately, this approach can backfire:

• Policies that fail to comply with UK GDPR requirements

• Contracts drafted under incorrect/outdated legal frameworks

• Retention schedules, Data Protection Impact Assessments (DPIAs), and privacy notices that conflict with UK law

• Advice that seems confident but collapses under expert review

  
  

By the time these mistakes are fixed, any initial savings vanish. In many cases, the business spends more correcting errors than it would have by commissioning proper work from the start.

The key point is clear: AI will always give you an answer, but it will not always give you the right answer.

AI is only as good as the information it receives

The Legal Risks Are Larger Than Most SMEs Realize

Many SMEs underestimate the legal risks tied to AI-generated decisions. Using AI without proper oversight can expose a business to regulatory penalties, contract disputes, and reputational damage.

Data Protection and Privacy

AI tools often process personal data. If an SME uses AI to draft privacy policies or handle data without ensuring compliance with laws like the UK GDPR, it risks fines and enforcement actions. For example, a privacy notice generated by AI might omit key information about data subject rights or data sharing practices, leaving the business vulnerable.

Contractual Errors

Contracts created or reviewed by AI may contain clauses that do not reflect the correct jurisdiction or legal standards. This can lead to unenforceable agreements or unintended liabilities. One SME we worked with faced a costly dispute because their AI-generated contract referenced outdated regulations.

Liability for Advice

Some SMEs rely on AI for business or legal advice. AI can produce confident-sounding recommendations that lack legal grounding. If a business acts on flawed advice, it may face financial losses or legal claims. Unlike human advisors, AI cannot be held accountable or provide tailored risk assessments.

How SMEs Can Use AI Safely

AI can be a valuable tool when used correctly. The key is to treat AI as a support system, not a replacement for expert judgment.

• Use AI to gather information or draft initial versions of documents, but always have a qualified professional review and approve the final output.

• Understand the limits of AI and avoid relying on it for complex legal or strategic decisions.

• Invest in training so your team knows how to spot AI errors and when to seek expert help.

• Keep up with legal developments related to AI and data protection to ensure ongoing compliance.

  
  

By combining AI with human expertise, SMEs can benefit from efficiency gains without exposing themselves to unnecessary risk.

Practical Examples of AI Misuse and Lessons Learned

• An SME used AI to create a data retention schedule that conflicted with UK data protection laws. The error was discovered during a regulatory audit, resulting in fines and mandatory corrective actions.

• Another business relied on AI-generated contract templates that lacked essential clauses for liability and dispute resolution. This oversight led to a costly legal dispute with a supplier.

• A company accepted AI-generated advice on employee data handling, which failed to consider recent changes in employment law. This mistake caused employee grievances and legal challenges.

  
  

These examples show how AI shortcuts can lead to expensive consequences. The lesson is to use AI carefully and always involve human experts.

Final Thoughts

SMEs face enormous pressure to make quick decisions and cut costs. AI offers tempting shortcuts, but blind trust in AI can cause serious legal problems. The technology is a tool to assist, not replace, human judgment. Business owners should heed warnings from AI leaders and treat AI outputs with caution.

The best approach is to combine AI’s speed with expert oversight. This balance helps SMEs avoid costly mistakes and stay compliant with the law. When pressure mounts, resist the urge to cut corners with AI. Instead, invest in proper advice and review. That investment protects your business and builds a stronger foundation for growth.