Data centres (“DCs”) are the digital backbone of modern enterprise. With the explosive growth of AI and cloud computing, DC development is accelerating globally. This expansion brings a familiar yet industry-specific mix of legal risks that developers, operators, contractors, tenants, and suppliers must navigate.
Some of the most important risk areas are set out below, followed by some practical tips on how to prevent disputes or, if unavoidable, how best to resolve them.
Regulatory Risks: energy, water, emissions and cybersecurity compliance
Hyperscale DCs require over 100 MW of operational capacity. The growing use of water cooling, for efficiency and scalability reasons, has intensified scrutiny of water usage, especially amid rising global water scarcity. Already, the EU Recast Energy Efficiency Directive (2023/1791) mandates that DCs with ≥500 kW IT power demand must report waste heat reuse (e.g. in municipal heating networks), power and water usage metrics as well as other KPIs. The EU Digital Decade Strategy aims for all DCs to be climate-neutral and energy-efficient by 2030, with heat recovery as a core requirement. All of this may lead to design and retrofit disputes, change of law/force majeure-based disputes or disputed contractual penalties.
Increasing cybersecurity obligations may lead to scope creep on projects and claims for increased compensation by contractors, or delays to commissioning due to certification hold-ups.
Construction complexity and procurement models
DC construction projects are growing in size and complexity. For scalability and to reduce construction time (with timelines often less than 18 months), modular construction is increasingly popular. This presents interface and scope misalignment risk for the developer where the module company does not provide an integrated, turnkey solution e.g. for prefabrication and installation. Owner furnished contractor supplied (OFCI) procurement models, whether modular, traditional or hybrid construction, present such integration challenges e.g. determining fault as between manufacturer warranties or contractor installation obligations.
Moreover, captive power infrastructure, such as renewable energy with lithium-iron storage to power the DCs, can create its own construction and supply issues. Due to their energy intensity, moderns DCs require more mechanical and electrical components, like transformers, than in the past. There is often high demand, and significant lead times for such equipment, which can lead to disputes between owners/developers, general contractors and suppliers.
Intellectual property and trade secret exposure
DC development is bringing together a variety of actors: DC developers, major tech companies, contractors, chip suppliers and start-ups, each of whom may share IP or trade secrets, including at the early concept sharing stage. This can produce claims linked to improper use of the shared information, especially where the arrangement was loose or recorded only in emails.
Investment protection in emerging markets
One of the most important ingredients in DC development is cheap real estate. This is leading to DC development in developing jurisdictions with uncertain and unpredictable regulatory and legal regimes, including in Africa and Latin America. Regulatory changes can significantly impact investment stability. Incentives that were previously offered to DC investors—such as tax relief, access to the grid, energy or natural resources, discounted utility rates, or zoning authorizations—may be withdrawn or revised. This can undermine the financial viability and operational structure of such projects, and may, in certain circumstances, involve breaches of investor protections in investment agreements and treaties – such as fair and equitable treatment and MFN clauses – which can lead to investor claims against host States.
Beyond potential disputes with the host government, these changes often lead to a ripple effect of conflicts among other key stakeholders, including DC operators, tenants (e.g. cloud service providers), facility management companies, insurers and utility providers.
Tools to mitigate disputes
The following tools can help mitigate legal risk and prepare for potential disputes:
- Due diligence on your contract counterparty e.g., the DC operator should investigate the customer’s operational history, financial standing and data governance. Early representations may support misrepresentation claims later.
- Regulatory Awareness: monitor evolving laws affecting energy, water, and cybersecurity compliance.
- Put it in writing: it is important that robust collaboration agreements, NDAs or JV agreements are in place to determine IP ownership and protect trade secrets and thus avoid disputes such as that in Digiport v Foram (District Court of Appeal of Florida).
- Be clear and specific in your contract e.g. does downtime begin when an individual rack is unavailable, or does it go to degradation or unavailability of network connectivity? And how exactly is it monitored for contract purposes? Define downtime, service levels, and monitoring mechanisms clearly.
- Think back-to-back: align delay penalties and responsibilities across all contractual layers.
- Include flexible price adjustment mechanisms e.g., in the SLA for energy costs of the DC’s function throughout the term of the agreement.
- Have sensible document protocols in place: these need to strike a balance between adequately logging what happens and when – e.g. server logs with information on system events, service alerts and internal communications – and avoiding unnecessary documents that may need to be disclosed in a legal proceeding.
- Choose the contractual dispute resolution options wisely: given the generally long-term nature of these contracts, it makes good sense to provide for a period of amicable settlement discussions involving senior executives and/or mediation. It is also advisable to provide for compatible arbitration clauses in contracts the performance of which are interlinked.
- Consider treaty protections early, especially for projects in lesser developed countries where recourse to local courts may not be a viable option, or where a contractual claim is not as attractive as an investment claim for strategic or cost reasons e.g. several contracts involved but with incompatible arbitration clauses, meaning parallel arbitrations.