The US State of Indiana and computer giant IBM are taking each other to court over a 10-year, $1.6 billion outsourcing contract that was designed to modernise Indiana's ageing welfare administration system.

Yesterday, the two parties filed claims and counterclaims against each other over the project, which came to a halt when Indiana Governor Mitch Daniels pulled the plug in October 2009, describing the system delivered by IBM as "unworkable".

Launched in 2007, the new system enabled state residents to apply for welfare benefits in person, online or via telephone and aimed to speed up and standardise eligibility determinations. High error rates and slow processing of eligibility requests quickly became a major source of contention between Indiana and IBM.

In an Indiana courtroom on Thursday, Indiana sued IBM for $1.3 billion, claiming breach of contract. The Indiana Family and Social Services Administration (FSSA) claims that processing errors from IBM led to faulty benefits denials that brought harm to needy citizens.

"FSSA was left with virtually nothing of value from IBM's failed performance, and indeed is now faced with expending hundreds of millions of dollars in re-programming and eventually entirely replacing IBM's failed systems, restructuring procedures and client services, and reengineering IBM's 'modernised' system," the state said.

In turn, IBM countersued for $52.8 million for fees and expenses outstanding. In a public statement, the company acknowledged that, although Indiana had the right to cancel, the contract requires the State to pay IBM "certain amounts", including deferred fees and equipment costs.

"By refusing to honor certain contract provisions, while at the same time relying on other provisions to remove IBM from the project, the State threatens to undermine the integrity of a public procurement process under which thousands of private companies conduct business with Indiana, expecting and depending on the State to fulfill its contractual commitments," the company said.