Introduction
Data centers are not merely technical infrastructure – they are the digital lifeblood of modern business. While disputes are an inevitable part of commercial life, those involving data center operations can have especially serious and far-reaching consequences, impacting not just operators and their customers, but also the broader ecosystem of end users.
In this piece, we explore practical strategies for handling disputes arising from data center operations.
Due diligence: Know your counterparty and the landscape
The best strategy for handling most disputes is to anticipate and prepare for them in advance. This starts when you are engaging in exploratory discussions with potential contractual counterparties. A data center operator is primarily concerned with understanding its customers’ financial health and track record, ensuring they are financially sound and compliant with any applicable regulatory regime in respect of their data. Failure to conduct proper due diligence could have devastating consequences for the operator in the event of a customer default. Similarly, a customer must conduct thorough due diligence on the operator, particularly where smaller or regional providers are involved or where subcontracting chains are opaque.
Regulatory due diligence is just as crucial, particularly in Asia, where the regulatory backdrop for data center operations is becoming more complex. Countries such as China, India and Indonesia are aggressively enforcing data localization laws, while global regulators are tightening their grip on cybersecurity and data protection, making breaches not just technical failures, but legal liabilities. Businesses must therefore map out the compliance landscape in their home jurisdiction and every location where data will be stored or processed, to ensure compliance with data localization laws and cross-border transfer restrictions, and also to assess the risk of extraterritorial enforcement such as under the European Union’s GDPR or the U.S. CLOUD Act.
The best weapon? A sharp, clear contract
A staggering number of disputes arise due to ambiguity in the underlying contracts, where the contracts fail to properly anticipate common failure points or to allocate risks clearly. Contracts relating to data center operations are no different.
Taking service level agreements (SLAs) between data center operators and customers as an example, these contracts should not simply set out aspirational uptime figures. Rather, they need to clearly state what counts as a breach, how performance is measured, what grace periods or remedies apply and how parties are to escalate issues that arise.
Common risk areas include:
- Fire: The use of lithium-ion (Li-ion) batteries in uninterruptible power supply (UPS) systems comes with a significant risk of fire, the consequences of which can be highly disruptive and expensive. Parties should discuss whether there should be a cap on the operator’s liability for fire incidents. Alternatively, customers may wish for the SLAs to stipulate liquidated damages in the event of a fire.
- Energy costs: Wild fluctuations in energy costs are largely out of the operators’ control yet can have significant impact on the business. Where non-green energy is used, remember to factor in the rising cost of obtaining carbon credits. Consider also adding express provisions to the SLAs allowing revision or renegotiation of prices if costs swing beyond certain pre-agreed boundaries.
- Evolving regulatory regime: Changes in the applicable regulatory regime, for example, relating to fire safety and cybersecurity, may expose operators to non-negligible unexpected costs. Again, the SLAs should be clear on whether such costs can be passed on to customers.
- Intellectual property (IP): Since data centers store not only data, but also often host valuable software, proprietary systems and collaborative platforms, it is important to properly define IP ownership, usage rights and post-termination obligations.
Some of the common risks affecting data center operations can be mitigated by third-party resources such as insurance, bank guarantees, fire suppression systems and power hedging contracts.
Strategic dispute resolution: Use the right tools
Dispute resolution clauses are often treated as standard boilerplate provisions and tend to be finalized at the eleventh hour with minimal thought as to whether they are fit for purpose. This is ill-advised. Careful consideration of these clauses during negotiation is necessary to ensure that they are truly suited to the specific circumstances of the parties. For example, where a contractual term spans a substantial length of time, such as is common in SLAs, it may be useful to impose a period of mandatory discussion before either party can commence formal proceedings. Further, would parties benefit from the confidentiality of arbitration or the public pressure that accompanies court litigation?
Similarly, where there is a complex contractual web involving multiple parties, the dispute resolution clauses should be considered together rather than in isolation. The efficiency of the dispute resolution process can be streamlined by, for example, stipulating identical (or at least compatible) governing law and dispute resolution clauses in the various contracts.
Aside from dispute resolution clauses, it is vital to ensure that the relevant contracts comply with any formalities stipulated by the applicable laws, including the local laws of the jurisdiction where the data centers are located. Some countries, for example, require contracts to be stamped or concluded in the national language for them to be valid and enforceable. Failure to comply with the necessary formalities can, at best, result in costly satellite litigation. At worst, it can render the contractual rights unenforceable.
When problems arise
The most common breach triggers in SLAs involve excessive downtime, failure to meet physical or cybersecurity standards, delays in critical migrations and failure to comply with data localization requirements. These failures are not only operational headaches; they can become legal flashpoints that expose businesses to claims, penalties and reputational damage.
When a breach occurs, several issues come sharply into focus. The governing law and jurisdiction specified in the contract will dictate how and where the dispute unfolds – and this can have a huge impact on costs, timelines and available remedies. There may also be a requirement to notify the counterparty of the breach within a certain time period, failing which a party may be barred from seeking relief.
Another relevant consideration at this stage is whether the parties’ obligations continue to run, notwithstanding the dispute. When can an operator suspend its services or access to infrastructure like energy and water? Similarly, when can the customer withhold payment due to an operator’s breach? Given the serious losses that could accrue due to unexpected downtime, it is important to comply strictly with the terms of the contract and seek legal advice to clarify terms that are ambiguous.
Another important, yet often underestimated, step during this phase is the preservation of digital evidence. Server logs, monitoring data, service alerts and internal communications can be vital in establishing what happened and when. Having protocols in place to preserve and manage this evidence from the earliest stages of a dispute can make a major difference down the line. Parties should also take care to avoid unnecessary paper trails that might be disclosable.
Conclusion
Disputes over data center operations are expected to be on the rise. However, many of the risks can be mitigated or managed through smarter contract design, thoughtful risk allocation and tailored dispute resolution strategies. If your business depends on data infrastructure, the time is ripe to pressure-test your contracts and protocols.
