As market volatility meets long-term commitments, sophisticated contract design becomes crucial for protecting data center investments.
When markets change rapidly, contracts can feel disconnected from reality. In data center development, this disconnect is particularly dangerous: the market evolves at breakneck speed due to AI demand, supply chain constraints, and shifting regulations, yet contracts often span decades.
This tension increasingly leads to disputes as parties seek to vary or exit agreements that no longer make commercial sense. Understanding the key pressure points, and building contracts that anticipate them, has become essential.
Three disruptions reshaping development
Today’s data center development faces pressure from multiple directions, but three issues consistently trigger contractual conflicts.
First, the power market has become increasingly volatile. AI’s massive energy demands, limited grid capacity, and growing competition have created a standoff. Notably, utility companies trying to justify investment in desperately needed power plants and grids are seeking long-term offtake agreements. However, developers and owners remain hesitant to commit to long-term arrangements due to uncertainty over the trajectory of the data center market. This delays critical capacity additions, means that new projects stall, and puts businesses at all levels at risk of breach of contract for failure to deliver.
In addition, hardware shortages have reached crisis levels. Heavy-duty power transformers now require two-to-four-year lead times, while backup generators carry two-to-three-year waiting lists. Rapid technological shifts, particularly the transition to liquid cooling, risk making today’s orders obsolete on arrival. This has resulted in a number of legal issues, as buyers and sellers look to terminate contracts that are no longer advantageous, and hardware suppliers withdraw from distribution agreements to sell directly, taking advantage of the seller-friendly market.
Finally, community resistance has evolved into sophisticated legal challenges. Local groups now raise complex procedural objections alongside environmental concerns. In one recent case, a judge voided a massive data center corridor’s rezoning because the county had failed to properly advertise public hearings and had disregarded community input. Reports indicate US$64 billion in US data center projects have been blocked or delayed by local opposition.
Building resilience through contract design
While these challenges seem daunting, proactive legal steps can maximize resilience against these issues.
Managing variations has become critical in an environment of inflation and limited supply. In such an environment, suppliers often face unforeseen increases in raw material, energy, or labor costs, leading to disputes where suppliers demand contract amendments or seek to terminate on technical grounds.
The solution is to ensure that any variations occur on an agreed basis by including clauses that require variations to be agreed in writing and signed. This minimizes the chance that any variation occurs as a result of a representation not intended to have legal force. Furthermore, where price may vary (e.g. with raw materials), consider using multi-directional price variation clauses to enable price to be tied to objective public cost indices, to create a more balanced risk distribution and to avoid costly legal battles.
Structuring around impossibility is equally important when external factors impact contracts. Parties may argue that obligations are no longer feasible, relying on force majeure or material adverse change clauses, or legal concepts such as frustration. COVID-19 and the Russia-Ukraine war were followed by a wave of claims under such provisions.
The solution is to clearly define both what is deemed force majeure and what happens if force majeure occurs. When deciding on these points, it is important to be as thorough as possible. Force majeure provisions are narrowly interpreted, so if a certain type of event is not covered (e.g. sanctions) then it will not fall within the provision, and if the agreed result of force majeure is ill-defined, parties may be both unable to act and unable to terminate. This is particularly important because boilerplate force majeure provisions are not well tailored to the needs of data centers. Delivery and performance obligations require similar attention in a dynamic market where suppliers may juggle their obligations to maximize profits, causing delays elsewhere. The solution is to define precise delivery schedules with clear, enforceable penalties for non-compliance.
Penalties, often in the form of liquidated damages, should provide a pre-agreed remedy for delays and breach without the need for costly litigation. Contracts should also define a party’s obligations to use “reasonable”, or even “best” commercial endeavors to carry out their obligations, e.g. to ensure that suppliers make a legitimate, and not a token attempt, to source alternative goods in the case that their default supply isn’t available.
The path forward
Data centers straddle long-term infrastructure and the fast-paced AI economy, making contracts liable to becoming broken or unbalanced long before they expire. Buyers and sellers must therefore be proactive: contracts should be fortified with detailed risk allocation mechanisms, allowing for redundancy, flexibility and penalties.
By embedding these protections, stakeholders can avoid lawsuits and preserve relationships throughout their supply chains, to the benefit of all involved. In a market where delays cost millions and $64 billion in projects hang in the balance, sophisticated contract design has evolved from a legal nicety to a business necessity.
*This exclusive article was co-authored by:
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** This exclusive piece first appeared in Issue 10 of w.media’s Cloud & Datacenters magazine, and may also be read online (pg 21-22) here:
