Cooling the heat: Practical strategies for data centre disputes

Data centres are the backbone of the digital economy, supporting everything from cloud services to critical infrastructure. When problems arise, the impact can cascade far beyond the immediate parties, disrupting entire ecosystems. These can result in claims above $10 million for direct and consequential damages.

With global data centre capex expected to surge from $434 billion in 2024 to $1.1 trillion by 2029, the scale and stakes are only growing. Disputes are inevitable, but with the right strategies in place from the outset, their impact can be managed, and there are practical ways to anticipate and navigate disputes in the data centre space.

Due diligence: Whom are you contracting with?

At risk of stating the obvious, remember to conduct adequate counterparty due diligence before signing the contract. Operators should ensure that customers are financially sound and compliant with the applicable regulations, particularly in respect of their data. Similarly, customers must check the operators’ track record and capital strength to honour long-term commitments and fund emergency fixes without delay, especially when dealing with smaller or regional providers or where subcontracting chains are opaque. 

Due diligence: What regulations apply?

Regulatory due diligence is just as crucial, especially given the increasingly complex regulatory frameworks in countries such as China, Russia, India and Indonesia. Businesses should map out the compliance landscapes in their home jurisdiction and every location where data will be stored or processed. This facilitates compliance with data localisation laws and cross-border transfer restrictions, and assesses the risk of extraterritorial enforcement such as under the European Union’s GDPR or the U.S. CLOUD Act.

Contract: Is it comprehensive and clear? 

Ensure that your contracts anticipate common failure points and allocate risks clearly between the parties. Contracts should clearly stipulate how performance is measured, what counts as a breach, what grace periods or remedies apply, and how parties are to escalate any issues.

Common flashpoints for service level agreements (SLAs) include:

• Fire risks: Some SLAs cap operators’ liability for fire incidents, given the significant risk of fire arising from the use of lithium-ion batteries in uninterruptible power supply systems. Alternatively, SLAs may stipulate liquidated damages in the event of a fire. 

• Fluctuating energy costs: Consider expressly permitting price revision or renegotiation if energy costs swing beyond pre-agreed parameters. This mitigates the impact of wild fluctuations in energy costs, which are largely out of the operators’ control. Where non-green energy is used, consider also the rising cost of obtaining carbon credits. 

• Changing regulatory regime: Evolving regulatory frameworks, for example those relating to fire safety and cybersecurity, could expose operators to significant unexpected costs. SLAs should clearly indicate whether such costs can be passed on to customers.

In addition to contractual allocation of risks, the flashpoints above can be mitigated by third-party resources such as insurance, bank guarantees, fire suppression systems and power hedging contracts.

Contract: Are the dispute resolution provisions fit for purpose?

Do not ignore dispute resolution provisions when negotiating the contract as they can make or break a case. Instead, consider the following:

• Confidentiality: Should disputes be resolved in a public or private forum? Operators may wish to keep details of outages confidential to avoid eroding customer confidence. Customers, on the other hand, may wish to rely on public pressure to ensure that the operators take swift action to rectify any deficiencies. 

• Compatibility: Where there is a complex contractual web involving multiple parties along a supply chain, the dispute resolution provisions in the various contracts should be streamlined to enhance the efficacy of any dispute resolution process. 

• Enforceability: Where are your counterparty’s assets? Asset location is a significant factor in determining whether to provide for court litigation or arbitration, and where such proceedings should take place. 

When problems arise, what are your rights, remedies and obligations?

Common breach triggers in SLAs include excessive downtime, failure to meet physical or cybersecurity standards, delays in critical migrations and failure to comply with data localisation requirements. The following are relevant when breaches occur:

• Who? Both sides need to be clear on who needs to continue doing what, notwithstanding the dispute, to avoid falling afoul of the contract. Contractual obligations generally continue to run unless there has been a very serious breach. 

• What? Actively preserve all evidence relating to the breach. Server logs, monitoring data, service alerts and internal communications can be vital in establishing what happened and when. Also, avoid unnecessary paper trails that might be disclosable.

• Where? The governing law and jurisdiction specified in the contract dictates how and where the dispute unfolds. This can have a huge impact on costs, timelines and available remedies.

• When? Does the contract require the innocent party to notify the other party of the breach within a certain time? The notifying party must observe any notification requirements closely.

• How? Similarly, does the contract require parties to attempt to resolve their differences amicably before commencing formal proceedings? While a failure to observe such stipulations may save time in the short term, it risks lengthy and costly satellite litigation.

Looking ahead

As digital infrastructure expands, so too does the risk and complexity of associated disputes. Regardless of where you are in the supply chain, smart planning around risk and resolution is essential. Get it right, and you stay ahead of disruption. Get it wrong, and a small glitch can snowball into a full-scale gridlock.