How to Draft an AI Vendor Contract Under the Colorado AI Act (SB 24-205): Required Clauses for Deployers and Developers
Colorado’s AI Act (SB 24-205) requires deployers and developers of “high-risk” AI systems to implement documented risk management, notice, and governance measures that should be hard-wired into vendor contracts. For Colorado businesses buying or providing AI tools, the contract is often the only practical mechanism to allocate compliance duties. This article lists contract clauses attorneys should draft to align with SB 24-205 for both deployer and developer relationships.
What SB 24-205 Means for AI Vendor Contracts in Colorado
Colorado’s Artificial Intelligence Act (SB 24-205) regulates certain uses of “high-risk” artificial intelligence systems by two key actors: developers (entities that develop or substantially modify an AI system) and deployers (entities that use a high-risk AI system in Colorado). The law’s centerpiece is prevention of algorithmic discrimination in consequential decisions—i.e., decisions that materially affect access to or terms of important opportunities such as housing, employment, education, lending/credit, insurance, and certain healthcare or legal services.
For attorneys drafting vendor agreements, SB 24-205 creates a practical reality: many statutory obligations (risk management, disclosures, user instructions, incident handling, and cooperation) require information and operational commitments that only the vendor can provide—or only the customer can perform. A well-drafted contract is therefore the compliance “bridge” between what the statute requires and what the parties can actually do in production.
Step One: Contractually Define the “High-Risk” Question
Before drafting the compliance clause set, the agreement should force an early, documented determination of whether the product or use case is a high-risk AI system under SB 24-205 and whether it will be used to make or be a substantial factor in a consequential decision.
Required deal definitions
Include definitions that track the statute (or incorporate them by reference), at minimum:
“High-Risk AI System” (as defined in SB 24-205), “Deployer,” “Developer,” “Consequential Decision,” and “Algorithmic Discrimination.” Add a defined term for “Intended Use” that describes the business process, decision point, and affected population.
Use-case gating clause (recommended)
Draft a gating clause stating that the customer may only use the system for the Intended Use, and any material change (new decision domain, new geography, new data sources, new population) triggers (1) a reassessment of high-risk status and (2) updated documentation and controls before expansion.
Core Clause Set for Developer-to-Deployer Agreements
If your client is buying AI (client is the deployer), the contract must compel the vendor (developer) to provide the documentation and cooperation that SB 24-205 expects developers to provide.
1) Developer documentation & disclosure package
Clause purpose: Ensure the deployer receives the information it needs to comply with risk management and notices.
Drafting points: Require delivery (before go-live and upon material updates) of a “High-Risk AI Compliance Packet,” typically including:
- System overview and intended uses/limitations
- Model inputs/outputs and decision logic description at a level enabling governance (not necessarily source code)
- Known limitations, performance considerations, and reasonably foreseeable misuse
- Data requirements: data types, quality expectations, and prohibited inputs
- Testing/validation summaries relevant to algorithmic discrimination risk
- Human oversight recommendations (when to override, when to review)
- Versioning and change logs
Example language: “Vendor shall provide and maintain System documentation sufficient for Customer to satisfy its deployer obligations under Colorado SB 24-205, including instructions for safe and lawful operation and information necessary to conduct and document impact and discrimination-risk assessments.”
2) Risk management cooperation & assessment support
Clause purpose: Align operational responsibilities for risk assessment and mitigation.
Drafting points: Require vendor participation in periodic reviews, including responding to questionnaires, providing test artifacts, and meeting service-level timelines. Tie cooperation to the customer’s compliance calendar (e.g., annual review and upon material changes).
3) Algorithmic discrimination mitigation warranties (carefully scoped)
Clause purpose: Convert statutory “reasonable care” concepts into enforceable commitments.
Drafting points: Avoid absolute outcomes (“will not discriminate”). Instead use process-based warranties:
- Vendor used reasonable care in design and testing to prevent algorithmic discrimination for the stated intended use
- Vendor maintains a documented risk management program for high-risk use cases
- Vendor will promptly correct identified material issues that create a foreseeable risk of algorithmic discrimination
4) Change management and regression testing
Clause purpose: SB 24-205 duties are ongoing; model updates can silently change risk.
Drafting points: Require advance notice of material changes (model architecture, training data sources, feature engineering, thresholds) and provide a customer “holdback” right for high-risk workflows until regression testing and updated documentation are supplied.
5) Audit and evidence rights (without overreaching)
Clause purpose: Allow the deployer to verify compliance-related claims.
Drafting points: Add a tiered structure:
- Baseline: annual compliance attestation + relevant third-party reports (SOC 2, ISO 27001, internal AI governance report)
- Enhanced: on-site/virtual audit only upon a defined trigger (credible discrimination claim, regulator inquiry, security incident impacting high-risk use)
- Confidentiality and scope limits to protect trade secrets
6) Incident reporting, complaints, and regulatory cooperation
Clause purpose: Ensure fast coordination if the AI tool contributes to harmful outcomes or investigations.
Drafting points: Define “AI Incident” to include credible allegations or evidence that system outputs contributed to algorithmic discrimination in a consequential decision. Require prompt notice, preservation of logs, RCA (root cause analysis), and cooperation with consumer notices where applicable.
7) Data rights, data minimization, and training restrictions
Clause purpose: Deployers must manage data risks; developers often want to reuse data for training.
Drafting points: Address:
- Whether customer data may be used to train or fine-tune models (opt-in is common for high-risk)
- Prohibitions on using sensitive data fields unless expressly authorized
- Retention limits and deletion/return upon termination
- Prompt access to logs necessary to explain/contest decisions
8) Indemnity tailored to SB 24-205 risk
Clause purpose: Allocate risk where each party controls the underlying behavior.
Drafting points: Consider a split indemnity:
- Vendor indemnifies for claims arising from the system’s failure to conform to provided documentation, undisclosed limitations, or vendor’s material breach of risk-management commitments
- Customer indemnifies for misuse, unauthorized modifications, or use outside the Intended Use
Also consider a specific remedy for “compliance failure” (e.g., vendor-funded mitigation plan, credits, termination rights) rather than relying only on general damages.
Core Clause Set for Deployer-to-Developer Agreements (When Your Client Is the AI Vendor)
If your client is providing an AI system that could be used in consequential decisions, the agreement should (1) prevent off-label high-risk usage, and (2) obtain the customer commitments necessary for the vendor to meet developer-side duties.
1) Customer use restrictions and “no consequential decision” option
Clause purpose: Reduce inadvertent high-risk status.
Drafting points: If the product is not intended for consequential decisions, state that explicitly and prohibit such use without a written amendment that includes a high-risk compliance addendum, pricing, and implementation requirements.
2) Deployer governance obligations and human oversight
Clause purpose: Deployers control how outputs are used in real decisions.
Drafting points: Require the customer to implement:
- Human review/escalation where recommended
- Policies and training for staff using AI outputs
- Monitoring for performance drift and bias indicators in their environment
3) Data quality and representativeness commitments
Clause purpose: Poor inputs can create discrimination risk regardless of model quality.
Drafting points: Include customer representations that data provided is accurate, lawfully obtained, and appropriate for the intended use; prohibit inclusion of certain fields unless documented (e.g., protected-class proxies) and require data preprocessing steps.
4) Feedback loops, log access, and transparency obligations
Clause purpose: Developers need post-deployment signals to detect issues.
Drafting points: Require the customer to provide structured feedback, allow collection of limited telemetry, and preserve decision logs so the parties can investigate discrimination claims and produce regulator-ready evidence.
5) Safe harbor alignment (documentation posture)
Clause purpose: SB 24-205 contemplates compliance programs; contracts should formalize them.
Drafting points: Attach an exhibit describing the vendor’s AI governance program, testing cadence, and update protocol. Include a covenant to keep those artifacts current and to provide them upon request under confidentiality
