The Hidden Liability Of AI Hallucinations: Can Businesses Sue AI Vendors For Incorrect Outputs?
Vansh Sharma, LLB (Hons), OP Jindal Global University, Sonipat. Haryana
ABSTRACT
When an AI tool invents some facts and a business acts on them, who pays? This article raises a question-about whether a business can make the company that built the AI pay for these made up outputs, known as hallucinations. It argues that the answer should usually be no, but not always. The liability should depend on four questions: was the harm foreseeable, how did the contract split the risk, how much human checking stood between the output and the loss, and for what the tool was being used. A general -purpose AI vendor has not been held liable till now by the court. Courts in US and India have blamed the professional who failed to check the work. The article then asks what an Indian business can actually sue under. The Consumer Protection Act, 2019 is the best route, through deficiency of service, product liability and unfair contract terms, but it excludes pure economic loss, which is what a hallucination usually causes, and may not cover commercial buyers at all. Contract law runs into the vendor “as is” disclaimer, which Indian courts uphold between equal parties. The article closes with where a claim can still win, how to plead it, and why the evidence must be preserved.
