Data Centers Are “Critical Infrastructure,” and That May Help Mitigate Business Impacts From COVID-19

With millions of Americans staying at home during the COVID-19 crisis, news outlets and internet infrastructure companies are all reporting significant increases in internet usage.  For example, Cloudflare data from mid-March showed an 18% jump in internet traffic since the start of the year, and a study from Nielsen suggests that people staying home can lead to a 60% increase in consumption of streaming content.  And of course there’s the spike in the now-ubiquitous Zoom video conferencing service, which saw its peak number of users last year at 10 million per day explode to more than 200 million per day as of April 1. See Zoom’s “Message to Our Users.”

This dramatic increase in internet usage has put the spotlight on the unsung hero of today’s online economy: the data center.  Recognizing the central role they play in our economy, California’s government has designated data center employees as “critical infrastructure workers” not subject to mandatory shutdowns in three different economic sectors: utility data centers in the electricity industry, telecommunications data centers, and information technology data centers. See Gov. Gavin Newsom’s Exec. Order N-33-20 regarding Essential Critical Infrastructure Workers. 

Despite their designation as critical infrastructure, COVID-19 is already having significant impacts on the data center industry with many legal ramifications. 

For example, reports suggest that many data center construction projects are being put on hold for the safety of construction crews.  Construction delays may also be caused by supply chain slow-downs, particular for components sourced from China.  Who bears the risk for these construction delays is of course governed by the specific terms of the construction contract.  But many data center construction contracts use American Institute of Architecture forms, even if they’re modified through negotiation, and those contracts typically assign the risk to the project owner.  For example, the AIA A201-2017 General Conditions reads:

§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by … (3) unusual delay in deliveries,… or other causes beyond the Contractor’s control; … or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

For further analysis of COVID-19’s impacts on construction projects, including risks that may be borne by subcontractors or suppliers, see the publication by our colleague Richard Shapiro, here.

There could also be increasing vacancies in co-location data center utilization where space is leased by third parties.  Those third parties might be wary of entering new contracts and unable to visit a data center site to ensure it complies with their needs, or they may be canceling contracts they already entered into.  Generally, parties canceling leases because of public health crises like COVID-19 might argue that the pandemic frustrates the purpose of the contract or, if shelter-in-place orders make it impossible to install equipment in a data center, they may argue that the lease contract fails for lack of consideration.  If the lease has a force majeure clause (many do not), that can also be a basis for attempting to void the contract.  See further analysis by our colleagues regarding force majeure here. 

The designation of data centers as essential infrastructure could provide ammunition to data center owners and operators to shift the risk for construction slow-downs and lease cancellations.