When AI “Innovation” Is Used to Justify Contractual Overreach

By Dee Ware

Artificial intelligence (“AI”) is increasingly referenced in software contracting discussions and dispute contexts as a justification for proposed contract or product changes that raise significant legal concerns. Where vendors rely on AI narratives to degrade existing products, impose unilateral pricing changes, or threaten termination for convenience when customers resist, the legal problem is not that software products evolve but that AI may be offered to manufacture necessity and deprive customers of the benefit of the bargain.

The Vendor Narrative: “AI Upgrade or Else”
AI can provide vendors with a powerful narrative: innovation requires change, but behind that narrative, a more aggressive strategy may be emerging. Without suggesting uniform or coordinated conduct, fact patterns that may give rise to disputes include:

• Forced migrations to AI‑based platforms
• Sudden removal of non‑AI features
• “AI surcharges” layered onto existing contracts
• Unilateral changes to usage metrics
• Degradation of legacy products to make AI versions look necessary

Courts have not yet specifically confronted AI being the justification for exercising discretion, but they have held that even broadly drafted contractual discretion may not be exercised in bad faith or in a manner that deprives the other party of the benefit of the bargain. See, e.g., Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., (1992) 2 Cal. 4th 342, 372-373. Thus, while a vendor may have discretion to make product changes, intentionally degrading a non-AI product to compel migration raises concerns.

When AI Changes the Purchased Product
Another context in which litigation risk may arise is when customers allege that software no longer functions as it did when the contract was signed. This can arise when core functionality is moved behind an AI paywall, legacy features are throttled or removed, performance obligations are revised to accommodate AI models, or “AI-enhanced” versions introduce instability that did not previously exist. 

While there are certainly legitimate reasons for product evolution, in applying general contract principles, courts have recognized that a party breaches a contract when it renders performance “illusory” or materially undermines the contract’s purpose. See, e.g., Harris v. TAP Worldwide, LLC (2016) 248 Cal.App.4th 373, 385 (“[a] contract is unenforceable as illusory when one of the parties has the unfettered or arbitrary right to modify or terminate the agreement or assumes no obligations thereunder.”). The analysis turns on the contract's express change rights and whether discretion was exercised reasonably and in good faith. See Triangle Mining Co v. Stauffer Chem. Co., 753 F.2d 734, 738 (9th Cir. 1985) ("Good faith . . . 'requires that a party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily or capriciously.'" (quoting Rao v. Rao, 718 F.2d 219, 223 (7th Cir. 1983)). These same principles can be applied in software disputes.

Pretextual Termination for Convenience
When a customer refuses to migrate to an AI-based platform or challenges AI-related pricing, termination may follow, not because performance is lacking but because the customer is no longer economically convenient. However, under such circumstances, it is likely that a court would scrutinize whether termination was used in bad faith or as a vehicle for fraud and reject a termination used as a pretext to escape unfavorable terms or coerce new pricing. Under federal law, where principles of termination for convenience first developed in the context of government contracts, courts have held that a termination for convenience clause cannot be used to avoid contractual obligations. See Torncello v. United States, 681 F.2d 756, 772 (Ct. Cl. 1982); see also Krygoski Constr. Co. v. United States, 94 F.3d 1537, 1541 (Fed. Cir. 1996) (a termination for convenience tainted by bad faith or an abuse of discretion constitutes a breach of contract).
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Building the Evidentiary Record and Positioning for Enforcement
When a vendor begins pushing AI‑driven changes, documentation becomes critical and often determines the outcome long before a dispute reaches a courtroom. Companies should preserve materials such as:

• Product degradation timelines
• Communications about forced AI upgrades
• Pricing changes and justifications
• Termination threats or ultimatums
• Evidence of reliance on legacy features
• Internal costs associated with forced migration
• Gaps between sales promises and actual performance

These disputes often hinge on whether the vendor’s conduct reflects legitimate evolution or a pretext to rewrite the commercial deal. That distinction is rarely obvious in real time. Companies that promptly escalate and respond with a disciplined strategy are far better positioned to protect their contractual rights and pursue relief when a vendor overreaches.