A £700m dispute between Fujitsu, one of the government’s big four IT suppliers, and the Department of Health is set to go to court after the failure of talks to reach a settlement over the company’s role in the £11bn NHS IT programme.

Fujitsu was fired for non-performance in 2008 from a £900m deal to install electronic patient records across the south of England and has been locked in claim and counter claim with the health department.

Moves sponsored by the Cabinet Office, and involving an attempt by a former ambassador to Japan to broker an out-of-court settlement with the company at both the UK and global level, have failed, however, according to senior government insiders, making court action virtually inevitable.

A health department spokesman said “we are still in dispute with Fujitsu” as the company noted it was “in formal legal proceedings to recover its losses”.

The failure to reach a settlement came as Andrew Lansley, the health secretary, said he was “dismantling” the programme, blaming Labour before its party conference next week for wasting taxpayers’ money on a programme that is running years behind schedule and will never now deliver all that was promised.

The precise details of what is to happen are less dramatic than the statement implies. The national board that oversees the programme is to be scrapped, with Francis Maude, the Cabinet Office minister, taking direct oversight.

Ministers said they would “accelerate” the implementation of an announcement made last year to give hospitals more choice over the systems they buy. Negotiations will start with CSC, which holds a £3bn deal, the biggest single contract in the programme, to supply systems across two-thirds of the country.

The US provider has over many years missed deadlines to get the electronic record working in hospitals, and David Cameron, the prime minister, has said all options are under consideration, including cancelling “all or part” of CSC’s deal.

The talks, which may run into next year, are likely to try to let CSC keep the parts of its programme that have worked tolerably well – for example, the remote hosting of records and GP and community installations – while freeing up money for hospitals to make their own choice of supplier.

CSC said it “fully supports the direction outlined” and believed that a “significantly modified, more flexible approach” that it said it had proposed would deliver benefits.

Thursday’s announcement followed the completion of a thorough policy review of the programme by the Cabinet Office, parts of which were selectively leaked by ministers. It said there could be “no confidence” that the programme could be delivered as originally conceived and that the government should “dismember” it and “reconstitute it under new management and organisation arrangements”.

Under these, Katie Davis, the senior Cabinet official sent to the health department in June to sort out the project, will remain in charge, with Mr Maude chairing an “oversight” committee.

The health department said Mr Lansley would spell out the plans in full in November, with the Commons public accounts committee having warned that there is absolutely no clarity about who will be responsible for contracts with IT suppliers in Mr Lansley’s reformed NHS.

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