Ask the Lawyer @ Silicon.com

Q: I am the MD of a medium-sized recruitment business. I commissioned a software development company to build recruitment software for my business.

They are constantly missing deadlines and are six months overdue on the finished product. We have been forced to use the half-completed system with serious repercussions to my business. The cost of continued development has exceeded the original price quoted for the project by five times. I cannot just turn off this project as the operating system carries our payroll and invoicing function totally.

I would like to sue the software business for not delivering the product as specified and on time and the ensuing restrictions to the growth of my business, they should now fund my company's purchase and implementation of new software with minimum disruption.

A: Every case turns on its particular facts and the specific terms of the contracts, so it's hard to comment on what you should do in this particular case. In contracts, you need to look at things like the timescale for development and whether these are estimates or firm commitments, payment provisions and whether payment is a fixed sum against deliverables or on a time and materials basis, and limitations on liability.

But even if the facts and the contracts build a good case, there are a number of things to consider before taking legal action.

First, if the software is simply licensed to you rather than to be owned by you, the supplier may be in a position to terminate the licence, which will be very awkward since you say the system is vital to your business. On the other hand, the fact that you are suing probably does not in itself entitle termination - so you could consider keeping the usable software and suing over the rest (and the over-runs for development of the working modules).

Second, you probably need the goodwill of the supplier for maintenance and such, and people being sued find ways to be less co-operative. Lack of access to source code is always a major hindrance.

Third, litigation of IT disputes is expensive, as they tend to be extremely factually complicated and may involve use of expert evidence. Litigation also eats huge amounts of management time. So unless there is a very good reason for not doing so, it is nearly always better to settle if at all possible. The best achievable solution for you may well be a commercial compromise of a kind which a court cannot usually impose - for example, involving further services or upgrades for free, in exchange for a waiver of any claim to recover money already paid.

Finally, bear in mind that what you have suffered is much more than what you will be able to recover - there will be exclusion clauses (albeit they may not be fully enforceable) and the law doesn't allow every conceivable loss to be recovered. And if the supplier is small, it may not be able to pay anyway.

So what should you do? As explained by you, it sounds as if you have a good case - 400% cost over-run!- though you should weigh what the supplier's counter arguments would be, about changing specifications, lack of access, delayed instructions, etc. But for the reasons above, you don't want to go to court if you can avoid it. However, evaluating the legal strengths of your case is an important part of entering negotiations from a position of strength. I suggest you consult a specialist IT lawyer, preferably experienced in dispute resolution, not just litigation, as mediation may well be more effective in the present case.

If it were me, I'd be investigating whether you can obtain a copy of the source code and design documents, with the right to put them to another supplier (under a well-structured written contract), with continued co-operation (such as interim support) from this supplier, but no further paid work. At least then your problems are past ones, not continuing ones. If your legal case is strong, the settlement might also include a refund of some moneys paid.

Q: I work for a US company, and we employ British consultants to work on software and web site projects. These consultants are based in the UK. What does a U.S. company need to consider when hiring "independent consultants"? Should we be reporting the money we pay them and, if so, to what British government agency?

A: Provided the individuals are genuinely consultants, working for different clients on a changing basis, then you have arms-length commercial contracts for services, and it's their problem to pay tax and national insurance to the authorities. There may still be other things to worry about, like making sure you own what they produce. Under English law, assignments of copyright must be in writing, signed by the assignor. The US concept of 'work for hire' does not exist in English law, and a contractor will own what he creates - you may well only have a non-exclusive licence to use it. They also have so-called 'moral rights' which should be waived in writing.

On the other hand, these people may in truth be employees, even if they work from home and use their own equipment. Home working, use of own resources, the number of different clients, and many other factors, are all relevant in working out whether or not someone is an employee. This is a well-developed and very complex area of law, because there are so many cases of people operating as 'contractors' to escape 'Pay as you earn' (PAYE) taxation. The Inland Revenue - our IRS - takes a dim view of this.

If what you have here are employees doing development work, then not only do you probably have an obligation to deduct and remit PAYE and National Insurance contributions, but you may also be operating a 'branch', which must by law be registered with the authorities (Companies House), and which creates a taxable presence for your corporation. While you'd only be paying tax on income relating to UK activities, there is also a requirement to file your US accounts on public record here.

If you have no other presence here, and no intention of ever having one, then you may take the view that sleeping dogs should be left lying - but if your corporation is growing, then sooner or later you'll want to exploit the European market. On that basis you should straighten things out now.

**Network Multimedia Television Ltd./Silicon.com give no warranties as to the accuracy of the information and advice contained herein and can take no responsibility for any acts or omissions resulting from reliance upon the information provided. Commentary is intended only as general guidance on legal issues arising from the circumstances described, and specific legal advice based on all relevant facts should always be sought.**