Clifford Chance

In this climate of growing demand for digital infrastructure, driven by ever increasing data generation and heightened connectivity requirements, it is not surprising that data centres, unglamorous buildings by some standards, are taking centre stage. The roll-out of 5G and associated technologies, ranging from the Internet of Things to artificial intelligence is expected further to increase demand. And on the horizon "6G" is already being whispered. This has all attracted new potential investors and developers into the sector and further raised the profile of data centres as an asset class.

Data centre development requires a deep knowledge of construction, market dynamics and the underlying technology. It also requires an understanding of interlocking areas of law and regulation, including site and infrastructure access, environmental issues, real estate, antitrust, data protection and cybersecurity. In this blog, our first in a series on data centres, we briefly consider some of the construction aspects that arise.

1. Typically data centre programmes will involve the placing of orders in advance of the main contract being signed to secure expensive items of large kit (such as chillers and generators). This raises various legal issues including:

• transfer of orders to the contractor: questions arise regarding the timing and terms of any novation (e.g. to what extent will contractors assume programme and performance risk in connection with these long lead items if they weren't involved in the initial procurement?). Given some of the difficulties around novation and wrapping, developers may wish to consider alternatives such as free-issuing items to contractors;
• responsibility for storage and insurance of off-site items: construction is likely to involve extensive off-site pre fabrication; and
• retention of title issues (particularly on insolvency) regarding plant, equipment and materials, for example securing valuable (and portable) components. The use of traditional vesting certificates is unlikely to be sufficient and clients will consider requiring on demand bonds for higher value items which are paid for and held off site.

2. Specialist packages such as chillers, generators, security (often biometric entry), fire prevention and acoustic control are likely to be regarded as critical by the client, who is likely therefore to seek approval/control rights over supplier selection to the extent not procured in advance of the main contract, and in some cases may seek to agree frameworks re key commercial terms. However, main contractors may have preferred solutions within their own supply chain and may seek to reduce their liability (for example, for delay) if the client insists on a different selection. Within this negotiation, clients will be seeking to avoid old style "nomination" by default, i.e. where the main contractor does not have full liability for subcontractor delay, default, defects or insolvency and the specialist sub-contractor can look to its nominating client for protection in certain cases. In our experience, it is sensible for clients to give themselves "step-in" rights in respect of important subcontract packages/supply agreements so that it can take over in the event of a main contractor insolvency. Developers should also consider the pros and cons of direct payments to the supply chain, an idea that is often appealing but is not without risks around paying twice.

3. Main contractors will seek to negotiate financial caps on liability and to exclude liability for certain types of financial loss that may arise as a result of defects causing the data centre to malfunction or close. Although still quite rare in the commercial real estate sector, caps are common market practice in the data centre sector as potential losses can dwarf the potential losses on other types of building usage. However, the parties should ensure that the drafting is precise and that any caps and exclusions are subject to an appropriate set of "carve-outs" which seek to ensure both that caps offer adequate protection for the liabilities which they are intended to cover and that the financial losses which the parties do want to be able to recover (there are always some) are indeed recoverable (follow this link to see our blog on the relationship between caps and carve-outs). Contractors may also insist on shorter warranty periods for certain equipment.

4. Most construction contracts for commercial office, residential or retail schemes do not (quite rightly) define practical completion. Instead, completion is a subjective test based on the professional judgement of the contract administrator following a physical inspection of the works.
However, this approach is unlikely to be sufficient for a data centre where the use of advanced technology means that a comprehensive milestone, commissioning and testing regime must be satisfied as a pre-cursor to completion being certified (in addition to the construction works otherwise having been completed to a standard which passes the subjective test).

5. Some clients may wish to have the ability to terminate the building contract should a key sub-contractor or supplier become insolvent prior to practical completion. This would be highly unusual in, say, an office project but may arise where lead in times for replacing key items or equipment could jeopardise the whole project. The consequences of termination need to be carefully negotiated particularly where the developer has effectively nominated the sub-contractor/supplier and in the context of knock-on consequences under any agreements with third parties (e.g. power purchase agreements or service agreements).

6. Wider issues such as requirements for onsite generating ability (primary or back-up) need to be taken in to account, together with the possibility of dedicated corporate power purchase arrangements from which the data centre may benefit.

The Clifford Chance Construction Group has advised on the development of some of the largest and most complex data centre projects across the globe and operates as part of Clifford Chance's wider sector expert team comprising our real estate and planning practice, together with our finance, projects, energy, regulatory and antitrust teams. Look out for our next blog where we consider some wider real estate development, planning and environmental issues around data centre investment and procurement.