Navigating Natural Gas Power Plant Construction Disputes

Introduction

The AI revolution is upon us, and AI runs on data centers. And those data centers run on huge measures of electricity to power and cool the servers. Existing grid and production infrastructure is insufficient to power all of the data facilities, so data center project developers have turned to constructing their own power plants.

Solar and wind power generation are options for self-developed infrastructure, but natural gas turbines fueled by abundant domestic supplies deliver the consistent output for loads required by hyperscale data centers. Although well-established in design and operation, the construction of a combined-cycle power plant comes with significant costs and risks. The Wall Street Journal reported in 2025 that the cost of building a natural-gas power plant has tripled over the past few years.^[1]

Even the best-planned projects may run into disputes, and parties should consider these recurring obstacles and opportunities while navigating disputes and seeking efficient resolution.

Strict Compliance with Contractual Notice Provisions

Courts routinely require strict compliance with default, termination, and construction bond coverage conditions, including formal notice requirements. Owners^[2] should not expect a court to provide equitable relief from strict compliance even if the Contractor has unclean hands or has acted in bad faith.^[3] Parties should strictly follow notice provisions and should do so promptly.

Owners may be reluctant to notice a default to a construction Contractor,^[4] as this may trigger an obligation to alert investors and/or lenders that the project faces difficulties, effectively signaling that the investment may not meet economic expectations. While these are real concerns, an Owner must nevertheless ensure that it follows contractual conditions precedent and preserves potential claims. Delaying notice to a poorly performing Contractor only increases challenges should the project enter litigation. Likewise, a Contractor’s delay of notice to an Owner or subcontractor for the sake of attempting to preserve a relationship will also increase challenges in litigation.^[5]

Documenting Failures and Preserving Evidence

The corollary of strict contractual notice compliance is that the noticed breaches should be documented through all possible evidence: detailed meeting minutes, written correspondence, contemporaneous periodic work logs, timestamped photographs and videos, and physical samples, such as geology cores and concrete specimens. Counterparties should be notified of any sampling and offered the opportunity to perform independent analysis, particularly where remedial work will limit future equal access.

The current project schedule can become an evidentiary stumbling block when a Contractor goes out of its way to maintain the schedule despite experiencing what should be considered excusable delays.^[6] Contractors often resist the effects of the so-called Parkinson’s Law — a once-satirical observation that work will expand to fill the available time for completion — in an effort to absorb delays that might not be the Contractor’s responsibility. Yet, this very effort to efficiently progress the project can become evidence that the Contractor did not contemporaneously perceive Owner-caused or sub-contractor-caused delays, leading to causation defenses.

Parties must also consider who will become credible fact witnesses with personal knowledge of the project and its challenges. Both Owners and Contractors may terminate or “run off” project leaders as a result of poor project progression. However, those very employees may be the best — if not key — witnesses to breaches, and their absence can lead to both a dearth of evidence and a scapegoat at whom an opponent may direct blame. Both Owners and Contractors should consider retaining employees throughout litigation, and include cooperation terms in separation agreements if termination is necessary. It is also best not to burn bridges. Some personnel are not the right fit. If there is mutual recognition of that at the point of departure, then it might mitigate the risk of an adverse witness in a subsequent dispute.

Mitigation & Acceleration

An aggrieved party has a duty to mitigate damages under nearly any controlling law regime.^[7] Should an Owner take drastic measures such as terminating a Contractor and calling a performance bond, the Owner should not expect that any path to project completion will result in full cost recovery. Rather, the replacement should perform in a reasonable manner consistent with the original contract. For example, if the original construction project called for a single daily shift, the Owner should not expect that the full cost of running a costly three-shift replacement will be easily recoverable.

A corollary to this consideration is that an Owner should be cognizant of ordering the Contractor to, for example, do anything possible to finish the project on time. Courts and tribunals have interpreted this sort of directive as an order to accelerate work, and uncompensated work acceleration can lead to claims and cost recovery.^[8]

Temporal Limitations on Claims

Owners should be aware that some states consider the installation of turbines and associated piping and instrumentation to be improvements to real property, triggering shorter temporal limitations for bringing claims.^[9] This is jurisdiction and fact specific (i.e., the exact work or equipment). The key to avoiding this issue is that Owners should not delay initiation of litigation, even in the interest of seeking collaborative or non-litigious dispute resolution.

Litigating Multiple Contracts in Multiple Forums

Natural gas power plant construction often involves multiple contracts, sometimes with overlapping parties and performance periods. The contracts include the EPC or EPCM^[10] Contract; the turbine purchase orders; the construction bonds; the long-term service agreement (“LTSA”); and a variety of Joint-Venture or financing Agreements. The plant may also be encumbered by natural gas off-take and power purchase agreements. Each of these contracts may include a different dispute resolution clause, and litigation under multiple contracts may result in simultaneous proceedings in different forums and venues.

The impact of the complexity of the contract structure is that parties, and particularly project Owners, must be prepared to run a multiple-horse race, with multiple proceedings ongoing simultaneously. Litigating multiple disputes simultaneously practically requires high volumes of filings and significant time for witnesses to prepare and sit for multiple depositions or to draft multiple witness statements. However, a clever legal strategy may permit a litigant to sequence proceedings to take advantage of preclusive effects from favorable decisions.

Special Considerations for First-of-a-Kind Technology

Disputes involving First-of-a-Kind (“FOAK”) technologies create unique considerations in multiple-contract structures associated with the construction and operation of natural gas power plants. The thermodynamic concepts and power generation principles of combined-cycle power plants are sound and proven; but the quest for ever-more efficient and environmentally friendly systems constantly drives technological advancement of the turbines. This drive for improvement has resulted in shortfalls resulting from overly optimistic performance guarantees and unexpected in situ structural degradation, in both gas and steam turbines. Examples of these systemic failures include heat rate performance shortfalls and blade oxidation issues, both in the mid-2010s.

Both Owners and Contractors must consider and balance the risk of FOAK technologies, including through sufficient recourse against the turbine manufacturer.^[11] This issue becomes particularly germane in situations where the turbine manufacturer reveals defects immediately after a key event, such as the transition from the warranty phase to the LTSA period.^[12] This may be an attempt by the supplier to avoid liquidated damages or the cancellation of the LTSA by delaying notification of a known but latent defect.

Consequential Damages Waivers

Construction contracts often include consequential damages waivers, significantly limiting amounts that may be claimed for construction delay or other breaches. Segregating consequential damages from direct damages can be a contentious and variable exercise. Texas courts have stated both that “[d]elay damages are consequential damages”^[13] and that “[g]enerally, damages that are consequential damages as to the breach of one contract may be direct damages as to the breach of another.”^[14] Though the limitation on damages recovery will depend both on the specific contract and jurisdiction, Owners should expect difficulty recovering losses on power purchase agreements or natural-gas offtake agreements from Contractors.

^[1] Jennifer Hiller, AI Data Centers, Desperate for Electricity, Are Building Their Own Power Grids, Wall St. J. (Oct. 15, 2025, 9:00 PM), https://www.wsj.com/business/energy-oil/ai-data-centers-desperate-for-electricity-are-building-their-own-power-plants-291f5c81?msockid=2f056643a85c6ec53c797033a9a46fe6.

^[2] For the purposes of this article, the term “Owner” refers generally to the equity holder, and has generally analogous meaning to employer, developer, and sponsor.

^[3] See James Constr. Grp., LLC v. Westlake Chem. Corp., 650 S.W.3d 392 (Tex. 2022).

^[4] For the purposes of this article, the term “Contractor” refers to an Engineering, Procurement, and Construction Contractor or a prime construction contractor.

^[5] See S. Texas Elec. Co-op. v. Dresser-Rand Co., 575 F.3d 504, 508 (5th Cir. 2009) (submitting the resolution of a contractual notice compliance dispute between construction contractor and turbine supplier to the jury).

^[6] A similar phenomenon may occur with an Owner who provides upbeat and optimistic progress reports to investors in the face of ongoing construction or engineering challenges and delays.

^[7] E.g., Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1, 908 S.W.2d 415, 426 (Tex. 1995) (“doctrine of mitigation of damages . . . prevents a party from recovering for damages resulting from a breach of contract that could be avoided by reasonable efforts on the part of the plaintiff”).

^[8] E.g., Tremack Co. v. Homestead Paving Co., 582 So. 2d 26 (Fla. Dist. Ct. App. 1991) (concluding that uncompensated subcontractor acceleration costs may be recovered, and insurer may be required to pay such costs under labor and material bond depending on policy language).

^[9] See Associated Elec. & Gas Ins. Servs. v. BendTec, Inc., 822 F.3d 420, 424 (8th Cir. 2016) (“Here, the pipes at issue are large integral components of the turbine and therefore permanent additions to it.”); Harder v. ACandS, 179 F.3d 609, 612–13 (8th Cir. 1999) (“As part of a properly working steam turbine, the blankets were permanent additions to or betterment of real property that enhanced the property’s capital value”).

^[10] “Engineering, Procurement, and Construction” or “Engineering, Procurement, and Construction Management.”

^[11] See Alap Shah, Who Owns the ‘Risk’ in First-of-a-Kind Gas Turbine Technology?, Power Engineering (May 21, 2015), https://www.power-eng.com/coal/who-owns-the-risk-in-first-of-a-kind-gas-turbine-technology/.

^[12] See Complaint at ¶ 8, Kellogg Brown & Root LLC v. Siemens Energy, Inc., No. LACI009714 (Iowa Dist. Ct. – Marshall Cnty. Dec. 8, 2017) (alleging that the EPC contractor submitted bid with a firm and an indicative price estimate for different turbine suppliers).

^[13] Zachry Const. Corp. v. Port of Houston Auth. of Harris Cnty., 449 S.W.3d 98, 114 n.71 (Tex. 2014).

^[14] ISI Contracting, Inc. v. Metro. Transit Auth. of Harris Cnty., 720 S.W.3d 767, 787 (Tex. App.—Houston [14th Dist.] 2025, no pet.).