With a Boom Comes Some Busts: Be Prepared for Increased Data Center Litigation

At a Glance

• Due to the likelihood of delays, contracting parties should clearly define what happens in the event of a delay and the circumstances in which a schedule extension may be allowed. And the parties should address mechanisms to avoid delays entirely, including requiring subcontractor vetting, requiring acknowledgements concerning existing market conditions, and clearly describing scopes of work and materials.
• Carefully analyze the reasonableness of any performance guarantees, place limitations or exceptions to such guarantees (including for any issues or interference arising out of one’s control), or consider striking guarantees entirely.
• Contracting parties should consider waiving consequential damages (or drafting carve-outs to any waiver), limiting liability to defined sums, and negotiating liquidated damages for any delays.
• Parties should strongly consider outlining a dispute resolution process for issues arising during construction, whether it’s a meeting of party principals, mandatory mediation, interim decisions made by project neutrals, or something else entirely. There should be a way for the parties to resolve or stay disputes to avoid project delays and stoppages.

Data centers fill key roles in our lives. They house the servers that keep us connected. They power some of the most rapid innovation we’ve ever seen. And unprecedented (and sometimes unbelievable) sums are being invested in their development. But lost in the excitement is much (if any) discussion of the litigation risks with data centers. Risks are everywhere. The size of the risks reflects the size of the projects: massive.

This article is not an exhaustive list of litigation risks. It’s an identification of many risks people overlook: the risks that receive little-to-no attention in the articles that inundate our inboxes and newspapers. These risks can threaten projects, companies, and the viability of data center projects. So, what are these litigation risks, and how can they be mitigated?

Let’s start with the litigation risks.

We see them at every phase of projects. The most publicized are encountered at the start, when the project is subject to local land use approvals for permitting and construction. At this juncture, the public has an opportunity to attend public hearings and voice their opposition. Depending on the source, there are estimates that local opposition groups delayed or blocked almost $100 billion in data center investments in just one quarter of 2025. Entrepreneurial individuals and companies are even marketing “litigation playbooks” to organize against and defeat data centers. Of course, such playbooks are not new. Their focus has simply shifted from solar and wind projects to the higher-dollar data center projects.

If the project can overcome public opposition and any appeals that follow, more challenges await. For example, construction is often delayed, and the delays can come from almost anywhere. Grid connection or power generation can take years, especially when you consider some projects are designed to deliver one gigawatt or more of capacity. Many projects are delayed or re-phased by utility interconnection queues and aging grid infrastructure not designed for 24/7 AI loads, which is now a primary schedule and cost risk. And these large-scale projects require lots of space, sophisticated equipment that services and fills hundreds of thousands of square feet across one or more buildings, and thousands of construction workers to actually build and install everything. When you pair these needs with well-known labor shortages, supply chain delays, evolving technologies, and aggressive construction schedules, it’s easy to see how delays can cause disputes during or after the project.

Litigation risks do not disappear when the facility is constructed. Rather, this is when the litigation risks are perhaps most diverse. A colocation provider may be unable to maintain a service level agreement with its occupants or fail to meet power supply requirements, which starts a lease dispute. The facility may have been designed or constructed improperly, creating defects or cooling failures that frustrate an end user’s ability to fully utilize a space. Equipment may be defective or malfunction, prompting warranty and other claims. Delay, lien, or other claims that arose during construction may emerge. Security or privacy disputes could occur, particularly due to the sensitivity and confidentiality of information being stored and operated on the servers at the sites. We have even seen trade secret claims surface.

Litigation risks with data centers are amplified by the damages that can occur. If a contractor builds a facility that costs hundreds of millions to construct, that contractor is assuming substantial risk if payments are delayed or withheld by an owner. Similarly, an owner has so much invested in a project that any delay or project defect will greatly impact its budget, planning, and ability to keep pace in the AI arms race. Despite all this, the risks have not deterred companies from participating — or from assuming more risk than they reasonably should.

How can these litigation risks be avoided or mitigated?

It all starts with focusing on basic contract provisions. Here are a few to consider:

Contract for delays and changes.

Due to the likelihood of delays, parties should clearly define what happens in the event of a delay and the circumstances in which a schedule extension may be allowed. Do certain delays add time to the project schedule? Should a contractor be compensated for any delays outside its control? Emphasis should also be placed on force majeure provisions to explain what is or is not an event outside of the parties’ control. And the parties should address mechanisms to avoid delays entirely, including (but not limited to) requiring subcontractor vetting, requiring acknowledgements concerning existing market conditions, and clearly describing scopes of work and materials.

Consider performance guarantees.

End users expect their facilities to meet specific operational standards. As a result, they may seek performance guarantees from their contractors, service providers, vendors, or even colocation providers. The parties should carefully analyze the reasonableness of any guarantees, place limitations or exceptions to such guarantees (including for any issues or interference arising out of their control), or consider striking guarantees entirely.

Pay close attention to damages and remedies provisions.

It’s no mystery that any problem arising on or from a data center project could have enormous financial consequences. Companies housing their servers must be able to use those servers. If they cannot, then they may struggle to run critical aspects of their business, lose profits, miss opportunities, and stymie growth. Contracting parties should consider waiving consequential damages (or drafting carve-outs to any waiver), limiting liability to defined sums, and negotiating liquidated damages for any delays. It may be no surprise that these provisions can become contentious during negotiations, especially as developers push for carve-outs to liability caps for data loss and cybersecurity issues that contractors resist.

Be thoughtful about dispute resolution.

Because disputes can happen at any phase of these projects, it’s important to think about how those disputes should be resolved. The parties should strongly consider outlining a dispute resolution process for issues arising during construction, whether it’s a meeting of party principals, mandatory mediation, interim decisions made by project neutrals, or something else entirely. There should be a way for the parties to resolve or stay disputes to avoid project delays and stoppages. Fundamentally, the parties should also indicate a preference for litigating disputes in court or arbitration. Arbitration may be strongly preferred by owners to better protect the confidentiality of discoverable information.

Let’s sum up.

As you evaluate your data center portfolio and contractual exposures, stress-test your arrangements and documentation protocols. Upfront diligence, systematic contract review, and modernized dispute resolution processes help protect your organization’s interests and minimize risk in this rapidly evolving environment.

In an era where data centers are central to technological innovation and daily life, the stakes — and the litigation risks — have never been higher. As projects grow in complexity and scale, so too do the opportunities for costly disputes, whether from public opposition, construction delays, operational failures, or contract breakdowns. The most effective way to protect your investments and operations is through proactive risk management: robust, tailored contracts; diligent project oversight; and thoughtful dispute resolution strategies. With the rapid evolution of technology and regulatory environments, organizations must continuously reassess their litigation exposures and adapt their protections. By prioritizing diligence, clarity in agreements, and readiness for dispute resolution, stakeholders can help ensure their data center initiatives not only survive but thrive in this high-stakes landscape.

More information?

For further information, you may contact Matt Olsen, B.J. Nodzon, Trip DeMuth, or Karen Denys.