Warranty and construction defect claims for AI data centers

In short

When a defect shows up in a new AI data center, the owner’s rights depend on a web of contracts, statutes, and insurance policies that is easy to misunderstand. The most common misunderstanding is that the AIA A201 General Conditions give only a one year warranty. The truth is that the AIA provides a one year correction period during which the contractor must return and fix nonconforming work, and a separate express warranty that continues for as long as the state’s statute of repose lets it, often five to ten years. AIA Learn, Tennessee Bar Association Implied warranties under the Uniform Commercial Code can apply to equipment purchases, and many states recognize an implied warranty that construction work will be performed in a good and workmanlike manner, though its reach in commercial projects is not uniform. UCC § 2-314, UCC § 2-316, UCC § 2-315, UCC § 2-315, Construction law briefing The Magnuson Moss Warranty Act does not generally apply to commercial AI data centers. FTC Guide

The practical headline is that AI data centers carry defect risks far beyond those of ordinary commercial buildings. Their electrical and cooling systems can make up 75 percent of construction cost and are held to performance standards that prescribe specific temperature, humidity, and uptime levels. Failing to meet those standards can trigger large liquidated damages even without any structural failure. Construction risk analysis, Performance guarantees analysis Builder’s risk and CGL insurance policies leave critical gaps. The complex chain of contracts among tenants, developers, and contractors often means the party that suffers the loss cannot recover from the party that caused it. Masin Webinar The final deadline for bringing any defect claim is the state’s statute of repose. That period runs five years from the performance or furnishing of services and construction in Virginia, ten years in Texas, seven years in Florida, and eight to ten years in Georgia and eight to nine years in Arizona. Tex. Civ. Prac. & Rem. Code § 16.009, Va. Code § 8.01-250, Fla. Stat. § 95.11(3)(b), O.C.G.A. § 9-3-51, A.R.S. § 12-552

The biggest mistake about the AIA construction warranty

The AIA A201 General Conditions, the form used in most large US construction projects, contains both an express warranty and a one-year correction period. Many people in the industry, including experienced contractors, believe that construction is a one-year warranty that ends all liability. That belief is wrong.

Section 3.5.1 of the A201 says the contractor warrants to the owner and architect that the materials and equipment will be of good quality and new, and that the work will conform to the contract documents and be free from defects. This warranty carries no time limit of its own. How long it lasts is set by the state’s statute of limitations or statute of repose. Law firm analysis

Section 12.2.2.1 gives the contractor one year from substantial completion to return and correct nonconforming work after receiving written notice from the owner. If the owner fails to send that notice within the year, the owner loses the right to make the contractor fix the defect and also loses the right to make a breach of warranty claim for that defect. But the owner does not lose the right to sue for damages under the express warranty if the defect is found later and the repose period still has time left. AIA A201 § 12.2.5

The AIA itself has warned that the phrase one year warranty should never be used in contracts based on its General Conditions because the contractor can be financially liable for defective work for as long as may be allowed by the applicable statute of limitations or repose. TBA Law Blog

Example. An AI data center in Northern Virginia reaches substantial completion in May 2025. The owner gives the contractor a list of punch items within the first year, but nobody notices that a waterproofing detail was installed incorrectly. In early 2028, heavy rain exposes the defect and causes water damage to servers. Virginia’s statute of repose is five years. The owner has until May 2030 to sue the contractor for breach of the express warranty, even though the one-year correction period ended in 2026. Va. Code § 8.01-246

Implied warranties that protect AI data center owners

Beyond the express promises in the construction contract, the law adds two layers of implied warranties that can help an owner when a defect surfaces.

UCC implied warranties for bought equipment

The Uniform Commercial Code Article 2 applies to sales of goods. When an AI data center owner buys servers, cooling units, generators, switchgear, or prefabricated modular data hall components, those purchases often come with two implied warranties unless they are disclaimed.

First is the warranty of merchantability under UCC section 2-314. Goods sold by a merchant must be fit for the ordinary purposes for which such goods are used. UCC § 2-314 For a generator, that means it must produce its rated power. For a cooling unit, it must keep the temperature range that comparable units achieve.

Second is the warranty of fitness for a particular purpose under section 2-315. Where the seller at the time of contracting has reason to know the particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, an implied warranty arises that the goods will be fit for that purpose, unless excluded or modified under § 2-316. In an AI data center, if a vendor knows the cooling system must remove a specific heat load per rack and the buyer relies on the vendor to choose the model, the vendor warrants that the chosen equipment will meet that load.

These UCC warranties can be disclaimed, but the disclaimer must follow strict rules. Under section 2-316, to exclude the warranty of merchantability, the language must mention merchantability and, if in writing, must be conspicuous. UCC § 2-316 To exclude the warranty of fitness, the exclusion must also be in writing and conspicuous. A simple clause in the back of an invoice usually will not work. Language such as as is or with all faults can also exclude implied warranties, but it must be conspicuous and is less common in large commercial purchases.

Whether a mixed contract for construction services and equipment falls under the UCC depends on a court’s predominant purpose test. A contract for a prefabricated power module built offsite and then installed may be treated as a sale of goods governed by the UCC, while a contract for traditional on-site construction is typically governed by common law. ConsensusDocs Owners should review their equipment purchase orders to understand which UCC warranties apply and whether they have been disclaimed.

The common law implied warranty of good workmanship

Separately, many states recognize an implied warranty that a contractor will perform its work in a good and workmanlike manner. This warranty comes from the law, not from the contract. It means the contractor must meet the skill and care standard ordinarily held by members of the trade.

The trouble for AI data center projects is that not every state applies this implied warranty to commercial construction. In Texas, a state appellate court noted that it is not fully settled whether the implied warranty of good and workmanlike services extends to commercial projects. A Texas construction law analysis explains that parties can eliminate this uncertainty through express contract language. Law firm analysis In Arizona, the supreme court held in a residential case that the implied warranty of workmanship cannot be waived, but that decision does not reach commercial buildings. Zambrano v. M & RC II, LLC. Because the law is unsettled in several major build markets, project counsel should address the implied warranty head on in the contract.

Does the Magnuson Moss Warranty Act apply? Generally no

The federal Magnuson Moss Warranty Act regulates written warranties on consumer products. A consumer product is tangible personal property distributed in commerce and normally used for personal, family, or household purposes. 15 U.S.C. § 2301 The Act stops warrantors from disclaiming implied warranties when they give a written warranty and requires clear remedy terms. None of that helps the owner of an AI data center, because the building and its core systems are commercial, not consumer.

There is one slim line drawn by the FTC. A regulation says that when a homeowner hires a builder, the structure itself is not a consumer product. But separate items of equipment attached to the realty, like an air conditioner or furnace, can be consumer products under the Act. 16 C.F.R. § 700.1(a), 16 C.F.R. § 700.1(c) The same thinking could in theory apply to a CRAC unit or UPS system sold as a standalone item for a commercial data center. No reported court decision has applied the Magnuson Moss Warranty Act in that setting. The Magnuson Moss Warranty Act does not apply to commercial products, only to consumer products, and it prohibits anyone who offers a written warranty from disclaiming or modifying implied warranties. FTC Guide

How long can a defect claim survive? The state by state cutoff

Every construction defect claim, whether brought on an express warranty, an implied warranty, or tort, ends when the state’s statute of repose runs out. The statute of repose is an absolute bar measured from substantial completion or a similar trigger. It does not matter if the defect is still hidden. The claim is dead once the repose period expires. The statute of limitations gives a shorter window, typically two to six years from the date the defect was discovered or should have been discovered. The mixture of these two clocks, plus the possible effect of the discovery rule for latent defects, sets the true lifespan of a claim.

Below are the repose periods for the five largest US AI data center build markets.

Source, CAI State Construction Defect Statutes Chart, FindLaw

Latent defects and the discovery rule

A latent defect is one that a reasonable inspection would not find. In an AI data center, that could be an electrical conductor that passes commissioning but is undersized for the larger load the owner adds later, or a waterproofing error buried behind a poured wall. The discovery rule can pause the running of the statute of limitations until the defect is found or should have been found. It cannot, however, push a claim past the statute of repose. So in Virginia, if a latent defect is first noticed six years after completion, the claim is already dead. In Texas, the same defect would remain alive for up to four more years. Law firm analysis, Tex. Civ. Prac. & Rem. Code § 16.009

Industry sources have reported multiple cases of defects discovered years after a data center was finished, such as electrical conductors that did not meet the specified ampacity and only showed the problem when electrical loads were increased. These examples show that the repose deadline is a hard cutoff. Consulting-Specifying Engineer

Why AI data center defects cut deeper than ordinary building defects

The risk profile of an AI data center is fundamentally different from an office building or warehouse. The factors below multiply the financial and legal consequences of every defect.

Performance guarantees turn a defect into a measured dollar amount

Unlike a conventional building, an AI data center must perform to exact technical metrics, including continuous data processing, specified internet connection speeds, power usage effectiveness, IT equipment cooling within tight temperature and humidity bands, and often Uptime Institute tier certification. The construction contract itself usually guarantees these metrics.

If the standards are not met, the owner can demand corrective work, extended warranties, or liquidated damages. AI data center contracts commonly impose performance liquidated damages if the GC fails to meet those levels. AGC Paper, TrueLook Even when the building is structurally sound, a cooling system that fails to hold the design temperature under full IT load can trigger substantial liability.

The Sears data center outages in 2013 show how fast damages add up. A five-hour outage at one facility was alleged to cause $1.58 million in lost profits. While that dispute involved a maintenance contract rather than construction, it illustrates the scale of potential damages. Consulting-Specifying Engineer

Electrical and cooling systems dominate the cost and the risk

MEP systems can reach 75 percent of total AI data center construction cost. A defect in a generator, switchgear, chiller, or UPS can disable an entire data hall. Because those systems are both the largest cost item and the focus of performance guarantees, a defect there is a costly problem. AGC Paper

Speed to market pressures create structural defect traps

The race to deliver AI data centers on compressed schedules, sometimes within 12 months, can cause developers and contractors to skip soil tests, rush foundation pours, and shortchange waterproofing. The result can be foundation settlement, water intrusion, and structural failures that may not appear until long after the correction period. AGC Paper Structural defects are a major threat to an AI data center owner operator because, when they emerge years later, they can cause broad damage to sensitive electronics and may be outside the time window to recover from the original contractor. Masin Webinar

Powered shell construction multiplies risk

In many large AI data center projects, a powered shell is delivered first, meaning the core, shell, electrical, and cooling systems are complete enough for a tenant to install and run servers in finished data halls, while construction continues next door. That simultaneous occupancy and active construction creates dust, vibration, and temperature changes that can contaminate or destroy operating server equipment. The resulting claims often pit the tenant, who suffers downtime, against the contractor and the developer. AGC Paper

Early equipment procurement can void warranties

To avoid tariff spikes and supply chain delays, developers sometimes buy and store major equipment on site early. If that equipment sits in moisture or condensation for months before it is installed, the manufacturer’s warranty may be void before the AI data center is even complete. AGC Paper

Fire risk from Li ion batteries in UPS systems

AI data centers are shifting from lead acid batteries to lithium ion batteries in their UPS systems because Li ion packs more energy into a smaller space. But Li ion batteries can undergo thermal runaway, a self sustaining reaction that is hard to put out, creating a fire risk that lead-acid batteries do not have. This introduces a new category of defect and failure risk that contractors and insurers are still learning to handle. AGC Paper

The contract chain problem, why the owner often cannot recover

A typical AI data center project has at least three layers of contracts, including the hyperscaler tenant’s lease with the owner operator, the owner operator’s development agreement with the developer, and the developer’s construction contract with the general contractor. There may also be separate design contracts with engineers and architects. Each link in that chain has its own liability caps, exclusions for consequential damages, and termination rights.

A severe problem arises when a defect causes a service outage. The tenant lease may entitle the tenant to liquidated damages for each minute of downtime, termination rights, and credits against rent. The owner operator, facing those claims, looks up the chain to the developer or the GC. But the contractor’s contract may exclude consequential damages entirely and cap total liability at 10 percent of the contract price, far less than the tenant’s claim. Even if the contractor is clearly at fault, the owner may be stuck with the difference. Masin Webinar

After the contractual warranty period expires, or if the correction notice was missed, the developer typically has no further liability. The owner operator must then try to use third-party rights against the design team. Those rights are often narrower than what the owner would have had against the developer, and narrower than what the developer had against the contractor. The late discovery of structural defects can leave owners with only limited contractual remedies. Masin Webinar

What insurance does and does not cover?

The first instinct when a defect appears is to look to insurance. But the standard insurance products on a construction site leave large holes.

Builder’s risk policies carry a defective workmanship exclusion that bars coverage for the cost of fixing faulty or inadequate work, including subcontractor work. Courts treat negligent or poor judgment work the same as defective work. So if a subcontractor installs a cooling pipe incorrectly and it leaks, the builder’s risk policy will not pay for the rework. AGC Paper

Commercial general liability policies contain a contractual liability exclusion, often called Exclusion b. It bars coverage for amounts the insured must pay only because it assumed liability under a contract, including most express warranties. A contractor that warrants the work will be free of defects and then must pay to fix it cannot turn to the CGL policy for that repair cost. AGC Paper

Professional liability insurance covers errors and omissions by design professionals. If a mechanical engineer miscalculates the heat load for a data hall and the cooling system is undersized, only the engineer’s professional liability policy could respond. Neither the builder’s risk nor the CGL policy will cover that pure design error. If the engineer carries no professional liability coverage, the loss may go unpaid. AGC Paper

Taken together, these insurance gaps mean the financial burden of a defect often lands on the owner unless the contracts have been carefully written to require subcontractors to carry adequate insurance and to assign rights against downstream insurers.

The economic loss doctrine, a state by state wildcard

The economic loss doctrine is a judge made rule that usually prevents a party from recovering purely economic losses (the cost to repair the defect, lost profits) in tort when a contract exists to allocate those risks. The doctrine forces claims into contract law. Its application varies widely among states and between commercial and residential projects.

For AI data centers, which are commercial, the doctrine can block an owner from suing a design professional in negligence if there is no direct contract. Some states apply the doctrine strictly in the commercial context. Others allow tort claims. Kansas, for example, in its 2011 David v. Hett decision, decided that the economic loss doctrine does not bar homeowners’ negligence claims against residential contractors, but the court did not address the question of whether the doctrine applies in commercial construction. David v. Hett, No. 98,419 (Kan. 2011) This unresolved question matters directly for AI data centers, which are commercial projects. In other states, courts have reached different results, some allowing tort suits and some barring them. The variation means that project participants must know the law of the state where the data center sits. Contractual choice of law clauses and assignments of claims can help manage the uncertainty.

How defect disputes get channeled into arbitration

AI data center construction disputes are increasingly resolved in arbitration. Industry reports show a rise in both the number and dollar amount of these cases across the Americas, driven by compressed schedules, complex technology, and performance demands. Global Arbitration Review

Arbitration offers confidentiality, which matters because AI data center specifications, tenant arrangements, and outage details are competitively sensitive. Many construction contracts for AI data centers include stepped dispute resolution procedures that require the parties to try a dispute board or mediation before they can start an arbitration. Binding arbitration, often under the rules of the International Chamber of Commerce or the American Arbitration Association, is the preferred method for resolving data center construction disputes. Global Arbitration Review

Key takeaways

1. The AIA one-year correction period is not a one-year warranty. The express warranty can extend long after the project’s completion. Owners must still send notice of defects within the first year or lose the right to demand correction and to make a breach of warranty claim for those specific defects. AIA Learn, Law firm analysis
2. Check the state’s statute of repose before you buy or build. Virginia gives only five years. Texas gives ten, and Florida now gives seven after a 2023 change. In most states, after the statute of repose period runs out, even a catastrophic construction defect cannot be remedied through the courts, though a few states lack a construction statute of repose entirely and others provide limited exceptions or extensions. CAI Chart, Law firm analysis
3. UCC implied warranties attach to equipment purchases. Make sure purchase orders and subcontracts do not accidentally disclaim them. A conspicuous disclaimer that uses the word merchantability is required, and the fitness warranty is especially valuable when a vendor selects equipment for a specific load. UCC § 2-316
4. Performance guarantees turn even a small defect into a multimillion-dollar claim. Data center contracts impose performance specifications for temperature, humidity, and cooling load, and failure to meet them can trigger substantial liquidated damages liability for the GC. AGC Paper, AGC Paper
5. Insurance does not fill the gap. Builder’s risk and CGL policies exclude the cost of correcting defective work. The AGC paper advises GCs to ensure that subcontractors with delegated design duties carry professional liability insurance and that CGL policies include completed operations coverage for post completion claims. AGC Paper
6. Align the upstream and downstream contracts. The tenant lease’s service-level damages and termination rights must be mirrored in the construction and design contracts, or the owner will be caught in the middle. Masin Webinar
7. The economic loss doctrine is not uniform. In some states an owner can sue a design professional in tort for economic losses even without a direct contract. In others that claim is barred. Know the law of the project’s state before a defect appears. David v. Hett, Law firm analysis

Frequently asked questions

Q:What is the difference between a warranty and a correction period?

A:A warranty is a promise that the work will be free of defects, and it can last as long as the applicable statute of limitations or repose allows. A correction period is a contractual obligation, usually one year, for the contractor to return and physically fix defects if the owner gives timely written notice. Missing the correction notice deadline can cut off some rights but may waive the right to have the contractor correct the work or to make a claim for defects discovered during that year, though warranty claims for defects found after the correction period can survive. AIA Learn

Q:How long does a contractor’s liability for a defect last?

A:It depends on the state’s statute of repose, measured from substantial completion. In Virginia, five years. In Texas, ten years. In Florida, seven years after a 2023 change from ten. In Georgia, eight to ten years, and in Arizona, eight to nine years. After that period runs, a claim is generally barred, but New York and Vermont have no construction statute of repose, many states grant extensions if injury occurs near the period’s end, and some states except claims involving intentional misconduct or gross negligence. CAI Chart

Q:Do the implied warranties of the UCC apply to an AI data center’s equipment?

A:Yes, if a contract is predominantly for the sale of goods, like prefabricated power modules or CRAC units. The warranties of merchantability and fitness for a particular purpose apply unless properly disclaimed. The disclaimer must be conspicuous, and for merchantability, it must mention the word merchantability. UCC §§ 2-314, 2-315, 2-316

Q:Does the Magnuson Moss Warranty Act protect an AI data center owner?

A:Generally no, because the Act covers only consumer products. Commercial AI data centers fall outside its scope. Under FTC guidance, any ambiguity about whether a product qualifies as a consumer product is resolved in favor of coverage, but the Act applies only to tangible personal property normally used for personal, family, or household purposes. 15 U.S.C. § 2301, 16 C.F.R. § 700.1(a)

Q:What is a latent defect and can I sue for it after the warranty period?

A:A latent defect is one that a reasonable inspection would not find. The statute of limitations may be paused until discovery, but the claim cannot be brought after the statute of repose expires. If the repose deadline has passed, the claim is dead. Consulting-Specifying Engineer

Q:Does builder’s risk insurance cover defective work?

A:No. Builder’s risk policies contain an exclusion for the cost of correcting faulty or inadequate workmanship. Even work that is the result of negligence is excluded. AGC Paper

Q:Can I sue a subcontractor or designer directly if I have no contract with them?

A:It depends on state law and the economic loss doctrine. In some states, tort claims for pure economic loss against a design professional with no direct contract are barred. In others, they may be allowed. For example, Kansas has not decided the question for commercial projects. David v. Hett

Q:What are performance liquidated damages and how high can they go?

A:They are sums the contractor must pay if the completed AI data center fails to meet agreed performance metrics, such as cooling capacity or uptime. AGC Paper

Q:Why do AI data center owners prefer arbitration for defect disputes?

A:Arbitration proceedings are private, which protects sensitive information like technical specifications, tenant names, and outage details that would become public in a court case. Many contracts also use multi step processes to keep disputes moving while construction continues. Global Arbitration Review

Q:How does a powered shell construction schedule increase defect risk?

A:When tenants operate servers in completed data halls while construction continues next door, dust, vibration, and temperature swings can damage equipment and trigger disputes between tenants, developers, and contractors. AGC Paper

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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.