Data centres: Managing risks and avoiding disputes during operation

The data centre industry has experienced a substantial rise in recent years, evolving from a niche asset class to a mainstream powerhouse, and now providing the bedrock digital infrastructure of our modern economy and world. In our final article in this risk management series, we look at the key risks and potential disputes which commonly arise in the operational phase of data centres and how to mitigate them.

Data centres are a unique hybrid of infrastructure, technology and real estate, and highly capital intensive. The sheer scale of investment required is attracting alternative funding sources to the industry, all looking to invest in the growing sector and expecting returns on investment.

To ensure successful long-term operational efficiency of a project, operators must be aware of the unique challenges brought about by the fast-paced advances of the data centre industry, so they can navigate risks and potential disputes more effectively.

In our previous articles, we have looked at risks at the contractual phase and the construction stage. In this article, we outline a sample of the key risks and disputes which commonly arise in post-contract and the operational phase of data centres, and explore strategies to mitigate these risks.

Power and infrastructure bottlenecks

AI advancements are driving significant increases in electricity demand, with data centres consuming 1-2% of total global power. Some predict this figure may double by 2030. Since demand is currently outpacing supply, there will likely be a deficit in available power to meet this rapid growth.

Existing power supply issues are further complicated by the uneven distribution of data centres across the globe. Currently, data centres tend to be concentrated in a few key regions that guarantee optimal access to connectivity, power availability and proximity to major markets.

To mitigate the risk of power constraints, it is important to have clear allocation of responsibilities for providing power in contracts, particularly in respect of testing and commissioning of data centres. As shortages of critical data centre related infrastructure become more acute, it is critical to invest time and ensure clarity when negotiating the relevant contracts at the outset. Furthermore, it is important to utilise the protections provided in contracts, for example, by issuing early warning notices or complying with contractual deadlines for notifying changes in the contract price or completion date.

Water cooling systems

Cooling data centres efficiently is crucial to preventing overheating and equipment damage. This function was previously performed by air cooling, but recent increases in server densities have prompted a shift towards liquid cooling, which is better suited to handling modern data centres.

However, risks associated with liquid cooling systems include:

• Inadequate design, uncertain design responsibilities within the supply chain, and usage of substandard materials.
• Poor maintenance practices and incorrect cooling load calculations which cause the equipment to overheat and compromise the data centre’s safety and reliability.
• Leakage risks and improper disposal of cooling fluids which may cause environmental or equipment damage.
• Potential disruption arising from plant swap-outs.

Despite the risks posed by liquid cooling systems, parties can mitigate these by:

a) Ensuring thorough and well-considered design and commissioning processes: Improved integration and communication between design and commissioning teams helps identify and address potential issues early, facilitating a smoother transition from concept to completion and reducing the likelihood of disputes arising.
b) Ensuring appropriate insurance coverage: Some insurers may be reluctant to provide cover for untested technologies or early-stage innovations. Professional indemnity policies will be critical to mitigating risk.
c) Supply chain considerations: Aligning with companies which have proven expertise in the sector across the supply chain to ensure supply can meet demand.

Water supply shortages

Directly related to water cooling, potential shortages in water, known as water stress, are a growing concern and becoming an increasingly important factor to consider when constructing or operating a data centre.

The significant stress placed on water resources by data centres has also resulted in disputes with local communities and environmental groups. Such disputes are expected to become increasingly prevalent in the coming years, proportional to the growth in demand for data centres.

There are, however, clear risk mitigation measures to address these challenges. These include optimising cooling systems and choosing locations for data centres in areas less prone to drought.

There is also a growing focus on recycling, such as recovering waste heat to reheat nearby buildings. Water can also be recycled within cooling systems, with rainwater capture offering future potential for cooling, and mitigating water stress issues.

Delay claims

Delays may arise from a range of issues and can affect both employers (seeking liquidated damages) and contractors (seeking extensions of time). Delay claims are a common feature of data centre disputes and are often unnecessarily complicated.

It is critical to have detailed programmes which measure progress and delay and make clear when various obligations are to be performed. In addition to detailed programmes, the project should have detailed records. In the event of a dispute, your position will be significantly improved if you have methodical and comprehensive progress records.

Regulatory challenges

The drive towards Net Zero conflicts with increasing power demands, with diesel generators remaining the most common sources of back-up power supply for Data Centres. The industry is also seeing a drive towards incentivising data centres which are designed using green forms of energy.

There is potential for disputes to arise over failures to achieve green targets, or a failure in new green technology resulting in claims against the operators, and in turn, the designers or contractors responsible and attracting severe regulatory penalties.

The key point is to avoid overstretching green data centre designs at the expense of redundancy. While achieving environmental goals is important, a data centre with frequent downtime is ultimately ineffective. Therefore, it is crucial to focus on thorough upfront design work and ensure that risk allocation in contracts is realistic and achievable. This approach is the most effective way to manage risk and prevent disputes in data centre projects.

How we can help

The data centre industry is evolving rapidly, presenting unique legal challenges in construction, risk management, and compliance. Simmons & Simmons has extensive experience advising on data centre projects, from pre-contract risk assessments to dispute resolution. Our dedicated team is here to help you navigate the complexities of this dynamic sector.