This study investigates whether AI-driven ethical procurement systems enhance firms’ circular supply chain orientation and how governance mechanisms affect supplier cost performance. Using survey data from 393 Indian firms and structural equation modeling, the research confirms that AI-based ethical systems significantly strengthen circular supply chain orientation. Circular orientation promotes both relational and contractual governance, but only relational governance—built on trust and collaboration—improves supplier cost performance. Contractual governance shows no significant effect. The findings extend transaction cost economics by revealing that, in circular supply chains, cost efficiency depends more on flexible, trust-based relationships than on formal contracts. Managerially, the study highlights that AI and relational governance together are critical for achieving ethical, sustainable, and cost-effective procurement in the circular economy.