The rise of data centre arbitration

The demand for data centres in Australia and around the world is increasing rapidly amid an expanding digital economy and the use of artificial intelligence (AI). Some researchers estimate that by 2030, data centres worldwide will require almost USD 7 trillion to keep up with the demand for computing power.

Australia is at the centre of this explosion of data centre construction:

• There are over 250 data centres across Australia and many more in the works.
  
• As one of four nations in the Asia-Pacific exempt from US export restrictions to AI chips, Australia holds a strategic advantage in the AI race.
  
• In 2024, Australia was the leading investment location for data centres behind only the United States.
  
• It has been projected that Australia's 'investable universe' for data centres will double to approximately AUD 40 billion by 2028.

Typically, growth in such sectors, which feature construction and supply chain pressures, regulatory shifts and cross-border investment challenges, results in an inevitable escalation in disputes.

Due to its benefits of efficiency, confidentiality and neutrality, arbitration is often the preferred means of resolving them - whether between commercial counterparties or between investors and states. With this in mind, domestic and foreign investors should prepare for any potential disputes now by ensuring that they are protected by robust arbitration clauses and under international investment treaties. This will help avoid the risk of public, protracted legal disputes through the court system.

Construction and delivery disputes: fast-tracked and high stakes

The complexity of these projects increases the likelihood of disputes arising. Issues relating to quality control and losing out on scarce infrastructure advantages such as available power may further give rise to data-centre-related disputes.

Data centre construction is 'uniquely demanding'. Projects are capital intensive, technically complex in integrating cooling, power and cybersecurity systems, dependent on the supply chain of essential components and invariably urgent: facilities are typically required to be operational within 12 to 18 months. These pressures heighten the risk of disputes in several areas:

• Delay and disruption: Global supply chain fragility, particularly for critical components such as cooling units and electrical transformers, will likely trigger delay claims and liquidated damages disputes.
• Quality and performance: High specifications for cooling, power and cybersecurity systems increase the scope for disagreements over quality control, defective works and commissioning failures.
• Scarcity of infrastructure inputs: With power and land availability increasingly scarce in metropolitan hubs, disputes are expected over access rights, grid connections and the allocation of scarce resources.

Given the confidential and technical nature of these disputes, arbitration is poised to become the default forum, especially where international contractors and suppliers are involved.

Operational and management disputes: long-term friction

Beyond the build phase, disputes are likely to emerge in the operation and management of data centres. Key drivers include:

• Service level breaches: Disruptions to uptime or security could lead to claims by hyperscale tenants or cloud service providers.
• Allocation of costs: Rising energy and water prices will trigger disputes over pass-through clauses and environmental compliance obligations.
• Joint venture disagreements: With foreign operators often entering Australia through partnerships, shareholder and governance disputes are likely to feature prominently.

These disputes are likely to attract arbitration because of the need for enforceable awards across multiple jurisdictions, neutrality in the choice of seat and the preservation of confidentiality in sensitive technology matters.

Regulatory change and sovereign risk: investor-state disputes on the horizon

Data centres sit at the crossroads of technology, sovereignty and national security. Regulatory shifts, whether sudden or incremental, will create fertile ground for investor-state arbitration. Issues include:

• Data localisation: Jurisdictions such as India already mandate local storage of payment data, and similar moves in Australia or its trading partners would force a costly reconfiguration of operations.
• National security review: Foreign participation in data centre ownership or management may attract greater scrutiny, particularly under foreign investment regimes, including Australia's Foreign Investment Review Board (FIRB) regime, mirroring developments in some other jurisdictions.
• Environmental constraints: Concerns about water and energy use may lead to restrictions in both planning approvals and environmental authorisations on new projects or retroactive regulatory measures impacting existing facilities.

In response to these regulatory changes, qualifying investors may have recourse to protections under investment treaties. Australia is a party to a network of bilateral investment treaties and free trade agreements. Many of these treaties define 'investment' broadly and therefore could cover a range of tangible and intangible property rights associated with data centres.

The standards of protection available to foreign investors in data centres are commonly comprised of a range of guarantees, including protection against direct and indirect expropriation.

Importantly, investment treaties generally allow qualifying investors to enforce their protections by arbitration against the host state, which avoids the need to litigate before domestic courts. Where treaty protections are breached, the investor may be able to claim compensation for current and future economic loss caused by the breach.

Given the extensive global investment treaty network, disputes of this kind are not speculative. Treaty-based arbitration is a realistic pathway for aggrieved investors seeking to recover losses from adverse state action.

Preparing for the disputes to come

The above developments foreshadow a rise in complex disputes in this sector, driven by a variety of factors:

• Construction-phase arbitrations will rise sharply, especially in claims for delays, supply chain disruption and performance failure, as data centre build timelines tighten and materials and components become more scarce or subject to cross-border disruption.
• Regulatory exposure will become a central theme. Investors will increasingly seek treaty protection or contractual safeguards, as governments respond to environmental pressures, water scarcity, energy demand, data and national security concerns.
• Energy cost and grid access disputes will become frequent, in both construction and operation phases, as data centres struggle with locating power sources, negotiating grid connection terms and managing costs under volatile energy markets or regulatory constraints (including decarbonisation policies).
• Contractual drafting and risk allocation will become more sophisticated. Parties will increasingly negotiate detailed force majeure, supply chain risk, sustainability / ESG compliance and express regulatory risk carve-outs.

To manage the risks involved, it will be important for corporate entities, investors and contractors entering the Australian and foreign data centre markets to consider whether:

• robust arbitration clauses are embedded in construction, operation and financing contract;
• cross-border investments in data centres are structured through jurisdictions with suitable treaty protections that can be enforced by investor-state arbitration; and
• potential regulatory risks are mapped out and inform the contractual allocation of delay, cost and compliance responsibilities.

Navigating data centres' legal landscape

The expansion of data centres in Australia and globally will inevitably bring a parallel expansion of disputes, spanning construction, operation, investment and regulation. Arbitration will be the mechanism through which many of these conflicts are resolved. For international investors and counterparties, the data centre revolution is not only a commercial opportunity but also a legal landscape that must be navigated with foresight.

This article was co-authored by Fiona Xia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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