Data centre dash: disputes risk in emerging markets, and 10 suggestions on how to manage it

A fast-growing asset class, data centres are dynamic and complex systems. They require careful design, management and optimisation to meet the unprecedented growth in demand fuelled by new ways of working and modern technologies.

In this Data Centre Insights series of articles, we explore and examine the challenges and opportunities that data centres present for the world in terms of technology, real estate, innovation, sustainability and investment.

Introduction

Data centres have become critical national infrastructure. Surging AI adoption, accelerating cloud migration, and the rise of edge computing are driving unprecedented investment in the sector. Emerging markets are scaling up as domestic digital economies are coming online, user bases are expanding rapidly, and governments and enterprises require in-country compute for low latency computing, resilience and compliance (including data localisation and sovereignty requirements).

However, projects built in these markets face a distinct risk profile. They combine heavy capital expenditure, complex technology, long-lead supply chains, and intensive energy and connectivity dependencies, all within a fast moving and unpredictable regulatory context. The result is an abundant environment for disputes impacting the entire project lifecycle: from development and construction risk, to performance problems, and ESG compliance issues. We outline the principal challenges facing international data centre projects in emerging markets¹, and offer 10 practical strategies for mitigating disputes risk. 

What drives investment in data centres and why new regions are the future

Global spending on data centres is remarkable. Investment is expected to reach USD 580 billion in 2025.²  Growth is projected to continue, with demand for computing power driven primarily by the AI boom, as well as the rise in edge computing and the rapid adoption of cloud services. Each of these requires enhanced data processing capabilities and robust infrastructure. Goldman Sachs projects global data centre power demand will increase by around 50% by 2027 and 165% by 2030.³ McKinsey projects that data centres will require USD 6.7 trillion in capital expenditure worldwide by 2030 to keep pace with the increasing demand for compute power.⁴ 

Across the global market, a small group of established markets has dominated the data centre sector to date. North America is the centre of gravity. Northern Virginia is the world's largest market,⁵  with Phoenix, Dallas, Atlanta, Chicago and Columbus also being very well established.⁶ In Europe, the FLAPD (Frankfurt, London, Amsterdam, Paris, Dublin) markets are dominant.⁷  Primary hubs in the Asia-Pacific are in Beijing, Shanghai, Tokyo, Sydney and Singapore.⁸

However, capacity in these primary hubs is tightening. Projects are facing problems of power constraints, long waits for grid connection and strict planning regimes.⁹  

• Limited power availability remains the number one inhibiter of growth in core hub markets.¹⁰  In the United States for example, queue times to connect to the grid are on average between one and three years, and up to seven years in Northern Virginia.¹¹   In the United Kingdom, the connection wait time for new data centres can be five years or more as 'zombie' projects (which secure a spot in the queue but do not progress because they do not have land or planning consent) create a backlog. 
• Additionally, land near suitable substations is becoming progressively more expensive and developers are pre-leasing land years in advance of delivery.

At the same time, emerging-market demand is accelerating as mobile internet uptake rises, cloud regions expand in country, and subsea cable landings and terrestrial fibre improve regional connectivity. These markets can offer lower land and labour costs, and in some cases more affordable power and faster build schedules.¹²  Across many regions, data sovereignty frameworks, sectoral residency rules (for example, in financial services and healthcare), and government cloud/AI programmes are material catalysts for in-country builds. For example:

• In the Middle East, hubs are emerging in Abu Dhabi, Dubai and Riyadh. Open AI for example has announced plans to build a 5GW data centre campus in Abu Dhabi called "Stargate UAE". Microsoft is planning to build data centres in the UAE in collaboration with G42.
• In Africa, a hot spot is emerging in Johannesburg and data centres are planned in key African markets. Nvidia and Cassava Technologies have announced a USD 700 million deal to develop data centres in Egypt, Nigeria, Kenya and Morocco.
• In the Asia-Pacific, Malaysia, Indonesia, Thailand and Vietnam are becoming important markets because of growing populations and increasing digital demands. Mumbai for example is expanding rapidly, with a high capacity currently under construction.¹³  Google has recently announced plans to build a new AI hub in Visakhapatnam in India. Total supply in the Asia-Pacific is expected to increase from 11.1 GW in 2023 to 26.7 GW by 2028.¹⁴

Why data centre projects in emerging markets are prone to disputes

Emerging countries other than China account for half of the world's internet users, but less than 10% of global data centre capacity.¹⁵  The opportunities in these markets are compelling. But emerging countries also present heightened legal and regulatory uncertainty that increases the risk profile of new data centre projects. These risks can translate into disputes if not anticipated and managed. 

Developers in emerging markets are seeking the trinity of land, connectivity and reliable, affordable, power supply. But the risks typically include: 

1. Administrative delay. The administrative processes for obtaining permits, grid connection and environmental approvals can be opaque or discretionary in emerging markets, lengthening timelines and possibly increasing corruption risk. 
2. Supply chain risk. Specialised equipment (such as cooling, power, electronics, or battery storage) is often procured internationally, exposing it to the risk of tariffs, export controls or logistical factors increasing the cost of equipment or delaying its delivery to site. Disputes can arise over liability for project delays or additional costs.
3. Cutting edge technology. Data centres must accommodate rapid advances in technology and are vulnerable to obsolescence. Disputes over defective design or fitness-for-purpose obligations can arise when there is a mismatch between legacy designs (particularly cooling systems) and evolving compute density.
4. Water and cooling constraints. Data centres require advanced cooling systems to cope with the increased thermal load of high-density AI workloads. In jurisdictions where water is less available (for example in the Middle East and some African states), cooling choices may face community opposition or lead to environmental litigation, making it more difficult to obtain necessary permits. Droughts and other conditions exacerbated by climate change only add to the challenge.
5. Contracting and delivery. Access to skilled, available contractors may be more difficult in emerging markets (for example it may be difficult to engage contractors with experience in delivering cutting edge projects). This increases interface risk, as multiple contractors may be required for different aspects of the project, and the possibility for disputes relating to quality. Similarly, joint ventures with local operators may experience tension if the joint venturers are misaligned in strategy or face challenges raising capital.
6. Access to (the right type of) power. Reliable power is fundamental to data centres. Access to power is a potential problem in some economies, particularly in regions with frequent power outages or power quality issues. Any disruption to connectivity can lead to disputes concerning force majeure, or price adjustment. In addition, many jurisdictions or users of data centres will require developers to comply with ESG requirements for power to come from 'green' sources, giving rise to a risk of non-compliance unless power is exclusively sourced from direct wire facilities.
7. Regulatory change and localisation requirements. Emerging markets may enact new data, cybersecurity, sustainability or localisation regulations without clear implementation guidance. This may lead to disputes over change in law provisions or possible investor-treaty claims where the State takes steps that effectively expropriate a foreign investor's investment. Similarly, tariff volatility can affect project budgets and pricing under power purchase agreements, leading to price re-opener disputes.

Layered on top of all of this is uncertainty as to the ultimate commercial necessity for all of the data centre capacity being built, particularly to support AI. Any downturn in the market will accentuate many of the factors underlying disputes. 

Practical mitigation strategies for international projects: 10 suggestions from our experience

Well-structured projects and contracts can materially reduce disputes risk when building new data centres in emerging markets. Important points to consider at the outset include:

1. Community engagement and social licence. Incorporate community investment and transparent communications about energy and water use into project plans. Early engagement reduces planning risk and the likelihood of injunctive relief or administrative challenges.
2. Supply chain resilience. Diversify suppliers and qualify alternates in advance. Build milestone payment structures and liquidated damages provisions into sub-contracts to pass down the risk of delay.
3. Stabilisation and change-in-law provisions. Include robust change-in-law mechanisms to address the risk of regulatory change. When contracting with a State entity, include stabilisation clauses which offer protection against changes in the regulatory regime without compensation.
4. Schedule and price changes. Balance fixed-price and schedule certainty with mechanisms to adapt to changes in the market or unexpected delay. Include carefully drafted force majeure, price adjustment, and variation clauses to help reduce the scope for disputes over entitlement to additional cost and extensions of time.
5. Termination rights. Include mechanisms to terminate the contract if expectations are not met and specify the compensation that flows from them.
6. Compliance. Technology projects in emerging markets often give rise to compliance concerns. Including clear and enforceable provisions regarding bribery and corruption, sanctions and fraud in contracts give developers options if issues arise. Audit rights and suspension and termination provisions can be an effective way of focusing counterparties' minds on the need to ensure adherence to the highest standards. Cyber security is a subject in itself, but developers will also want to ensure this is covered in contracts, often by reference to the latest internationally recognised standards such as those promulgated by the International Organization for Standardization.
7. Governing law. Choose a governing law with mature commercial jurisprudence. English law is a popular choice for international projects because its basis in precedent makes it predictable and certain. But be conscious that mandatory laws in the jurisdiction in which the data centre is sited may still come into play in a dispute.
8. Dispute resolution provision. Incorporate a dispute resolution provision that is fit for purpose. It may be prudent to incorporate expedited dispute resolution processes such as a standing dispute adjudication board for fast technical determinations as part of a tiered dispute resolution clause. International arbitration is a popular choice for resolving disputes on international projects because it provides a neutral forum apart from local court systems; is private; and arbitration awards are in principle globally enforceable under the New York Convention.
9. Enforcement planning. Think about enforcement up front by mapping out where your counterparty has assets against which you might enforce an arbitral award. Incorporate alternative forms of security in the contract including parent company guarantees or performance bonds that are payable on demand, with no scope for the counterparty to resist this.
10. Investment treaties. Think upfront about international investment treaty protection and structure new investments to attract protection. An example would be routing investment in a jurisdiction via an entity in a country with an investment treaty with that jurisdiction.

Conclusion

Emerging markets are indispensable to the next phase of data centre growth, particularly as AI infrastructure expands and countries pursue digital sovereignty. The risks in these jurisdictions are manageable with the right planning: robust governing law and dispute resolution frameworks, calibrated risk-sharing in contracts and resilient supply chains. Ultimately, drafting contracts with the possibility of change in mind – both with respect to the regulatory environment and the underlying technology – is the best dispute avoidance strategy in a rapidly changing landscape.

If you would like to discuss any of the above or explore how we can decrease your data centre costs and help to showcase your carbon footprint reduction, please get in touch. For more information on the key trends relating to data centres, please see accompanying articles on our Data Centres hub.

Authors: Dyfan Owen, Partner; Rebecca Clarke, Partner; Lucy McKenzie, Senior Associate; Harsh Hari Haran, Partner; Hana Byrne, Associate.