NHS faces £700m legal action over IT project

The NHS is facing an unprecedented £700 million legal action from a Japanese computer firm over a failed project to store electronically the health records of millions of Britons.

Fujitsu's contract with the NHS was terminated in May after negotiations between the company and health officials broke down. The Independent has now learnt that the Japanese firm is seeking to recoup the bulk of the £896m it would have been paid for the entire computer system.

Neither the company nor the NHS was prepared yesterday to comment on the precise details of the compensation figure, but sources close to the negotiations said Fujitsu was ready if necessary to go to court to press its £700m claim. The development is the latest setback in the troubled history of NHS computing, which has been beset by cost overruns, defective systems and late deliveries. The cancelled contract was part of the £12.7bn Connecting for Health programme to modernise NHS computers and provide every patient in England with an electronic health record.

It it ran into difficulties when the NHS tried to renegotiate the terms. Health officials wanted Fujitsu to provide a more localised records system for southern and western England, but the company said this would increase its costs substantially and asked for more money up-front. When the NHS refused to stump up, Fujitsu walked away from the negotiations – which caused the Government to terminate the contract.

Now Fujitsu is gearing up for a major confrontation with the Government with what could be the biggest compensation claim against the NHS in its 50-year history. Asked whether it could end up in court, a company spokesman said: "At the moment we're in dialogue with the NHS and we hope to come to a satisfactory outcome."

It is understood that only a small amount of the £896m has been paid to Fujitsu in upfront costs for the computers and software development. Some industry analysts estimate the company has spent about £300m since it secured the contract in 2004.

Fujitsu's deal was one of the biggest of the four regional contracts awarded by the NHS as part of the 10-year Connecting for Health programme, which is already four years late in terms of its overall implementation according to a report by the National Audit Office (NAO).

By last March, Fujitsu had supplied just nine out of 41 acute hospitals in southern England, and the systems were working so badly that the company had not been paid for most of them, according to the NAO.

The Connecting for Health programme has already suffered the blow of having one of its other suppliers pull out in 2006. But the US company Accenture was only allowed to keep £110m of the £173m it had been given as part of development costs – which suggests that the Government might be prepared to dig in over Fujitsu's much bigger claim.

Public procurement contracts allow the Government to pay only minimum development costs until a computer system is up and running, a health service spokeswoman said. Fujitsu and the NHS were working closely to ensure a smooth transition for a replacement supplier for the computerised record system for south and west England, she added.