Investment in AI data centres continues at pace, and as a result innovative ways of structuring the funding have emerged.
The FT has reported that Morgan Stanley has put together the biggest and most inventive AI infrastructure financings, including a $3.2bn bond for data centre developer TeraWulf backed by Google. They have also arranged a $27bn debt package for Meta’s Hyperion data centre with Blue Owl and arranged a $35bn chip financing deal for Broadcom.
Against that backdrop, it is clear that financing arrangements are becoming increasingly complex. In turn, these complex arrangements presents a range of litigation risks.
While many investors continue to focus on the commercial opportunities presented by AI infrastructure, they should also consider the litigation risks that accompany these transactions.
Increased reliance on external debt
One of the principal drivers of concern is the sheer scale of capital required. Estimates suggest that the global AI infrastructure investment could reach more than $5 trillion by the end of the decade. However, current revenues generated by AI services remain substantially below the capital expenditure needed to build the supporting infrastructure.
This funding gap has encouraged technology companies to rely increasingly on external debt rather than internally generated cash.
New arrangements to bolster traditional borrowing
Traditional corporate borrowing is now supplemented by private credit, securitisations, special purpose vehicles (SPVs), sale-and-leaseback arrangements and loans secured against specialist computing equipment such as graphics processing units (GPUs).
These structures provide access to substantial pools of capital, but they also distribute risk across multiple parties. With that dynamic, disputes are considerably more difficult to resolve when projects encounter financial stress.
The risk of default
A central litigation risk arises from the possibility of financial distress and default. The economics of many AI data centres depend upon assumptions about future demand for computing capacity, electricity availability and long-term customer commitments.
If those assumptions prove overly optimistic, developers may struggle to generate sufficient revenues to service their debt obligations. Because financing arrangements often involve multiple lenders, investors and SPVs, a default can trigger competing claims between creditors over priorities, security interests and enforcement rights.
This interconnectedness increases the likelihood that financial difficulties affecting one participant will spread throughout the wider financing structure. Construction delays, reductions in computing demand or the failure of a major customer may rapidly evolve from commercial setbacks into multi-party litigation involving lenders, developers, equipment suppliers and investors.
Legal exposure through disclosure obligations
Many large technology companies have increasingly utilised off-balance-sheet structures to finance data centre development. Although these arrangements may comply with applicable accounting standards, there are concerns that investors may not fully appreciate the scale of contingent liabilities created by lease commitments, residual value guarantees and SPV financing.
Where investors subsequently suffer losses, they may allege that offering documents or financial statements failed adequately to disclose the issuer's true financial position. Such claims could include allegations of misleading statements, material omissions or securities fraud.
Risk of fluctuating valuation of key components
Unlike conventional real estate developments, many AI data centre financings are secured not only against land and buildings but also against highly specialised computing hardware.
GPUs currently command high market values because of demand for AI training and inference. However, technological innovation is rapid, and newer generations of processors can significantly reduce the value of earlier models.
If GPU values decline more quickly than anticipated, lenders may issue margin calls or declare covenant breaches under financing agreements.
Borrowers, in turn, may dispute the valuation methodology used, argue that enforcement action is premature or challenge the commercial reasonableness of any subsequent sale of repossessed assets. These valuation disputes are likely to become increasingly common as hardware depreciation accelerates.
Delays may lead to missed milestones
Data centres require specialist design, substantial electricity supplies, sophisticated cooling systems and extensive grid connections. Delays in obtaining electrical infrastructure or specialist equipment can postpone project completion by months or even years.
Since financing agreements, lease commencements and customer contracts frequently depend upon milestone completion dates, construction delays can trigger cascading contractual disputes.
Developers may face claims for liquidated damages from tenants whose facilities are not delivered on time, while lenders may argue that delayed completion constitutes an event of default under financing agreements. Equipment suppliers, contractors and utility providers may likewise become involved in complex multi-party proceedings concerning responsibility for delays and additional costs.
Reduced demand can undermine the financing structure
Long-term customer contracts introduce another layer of legal complexity. Many AI data centres depend heavily on a limited number of anchor tenants that commit to purchasing computing capacity under long-term "take-or-pay" arrangements.
If a major customer reduces demand, terminates its contract or encounters financial difficulties, the resulting revenue shortfall may undermine the entire financing structure. What initially appears to be a straightforward contractual dispute can therefore develop into wider litigation involving lenders, investors and SPVs seeking to preserve expected cash flows.
Managing the legal risks
Sophisticated financing structures can unlock substantial investment, but they also create multiple contractual relationships that become vulnerable when commercial assumptions prove inaccurate. The combination of high leverage, specialised collateral, complex disclosure obligations and interconnected counterparties means that disputes are unlikely to remain isolated.
For lenders, investors and developers, legal risk should be viewed as an integral component of project finance rather than a remote contingency.
In order to manage the risks, parties should carry out robust due diligence before entering a transaction, and take care over the risk allocation mechanisms in the financing documentation. To minimise the risk of reputational damage, parties may consider opting for arbitration in the dispute resolution clauses, to take advantage of the confidential aspect of resolving disputes and avoid litigation in the public eye.
At Rahman Ravelli we have specialists in arbitration and litigation, particularly relating to distressed situations around data centres. As a disputes-only firm, with no transactional departments, we are conflict-free and able to act against financial institutions.
