Australia: Two–Nil: RACV wins against Unisys again!

Last Updated: 7 June 2004
Article by Irene Zeitler

In late 2001 we reported the decision of Justice Hansen in the Supreme Court of Victoria on a claim by RACV Insurance Pty Ltd (RACVI) and RACV Group Services Pty Ltd (RACVGS) against Unisys Australia Limited (Unisys) in respect of a failed IT project for the design, supply and installation of a work flow management system based on the imaging of documents (WMS System).

The WMS System was intended to replace RACVI's existing paper-based system for the processing of claims. The system delivered by Unisys in March 1995 failed in operation and was soon decommissioned. Although Unisys attempted to fix the problems, it was unsuccessful and in June 1996 RACVI terminated its contract with Unisys.

Justice Hansen found in favour of RACVI and RACVGS (collectively RACV) and awarded damages in the order of $4 million for expense wasted on the contract.

Unisys appealed the decision of Justice Hansen and on 14 May 2004, the Full Court of the Supreme Court of Victoria unanimously dismissed the appeal.

Decision of Justice Hansen

At first instance, Justice Hansen held that RACV was entitled to succeed on the basis of three key and untrue representations by Unisys which his Honour held constituted misleading and deceptive conduct in breach of section 52 of the Trade Practices Act.

The three key representations were as follows:

  • the Unisys proposal would if implemented provide adequate storage capacity to provide, on a 'date forward' basis, for all open claims on-line, all claims near-line for three months following closure, and closed claims older than three months off-line
  • high speed image access would be available in a WMS System for on-line claims with an expected response time in the vicinity of 2-4 seconds, and
  • image access would be available in a WMS System for near-line claims with an expected response time in the vicinity of 20 seconds maximum.

The representations had been made before RACVI had entered into the contract for the WMS System with Unisys and his Honour accepted that they had been relied upon by RACV. His Honour further held that insofar as the representations were as to future matters, Unisys had no reasonable grounds for making them.

Appeal to the Full Court

On appeal, Unisys unsuccessfully and much to the annoyance of Acting Justice Phillips who delivered the lead judgment (the other two judges concurred) challenged nearly every step of Justice Hansen's reasoning and on occasion his Honour's primary findings of fact.

Some of the more interesting arguments put by Unisys included the following:

  • the WMS System could have been, if implemented in June 1996 when RACVI terminated its contract with Unisys, made to work. Further, the losses suffered by RACV could have been avoided by taking some relatively simple steps such as adding more cache at a cost of less than $40,000 – Acting Justice Phillips held that while it was true that Unisys had fixed some of the errors, there were still many problems of functionality remaining. His Honour was satisfied that it remained unclear when and how these problems would be fixed. RACVI had already been more than patient in giving Unisys an extension of time and had thus acted reasonably in terminating the contract
  • the correctness or reasonableness of the representations made pre-contract signing could not be fairly judged by reference to events in June 1996, if only because of numerous design changes made to the WMS System in the intervening period, including in particular a change from single image retrieval to retrieval by folders (this argument was also rejected by Acting Justice Phillips). Unisys had failed to show a relevant connection between the representations and the changes made
  • the representations had been qualified or withdrawn by Unisys. By way of support, Unisys referred to certain clauses in the response to the Request for Proposal and in the contract. In the response, Unisys had stated it was unable to commit to response times. The trial judge had held that this qualification was properly a reference to response time to service calls and not response times to the retrieval of image. Unisys further argued that the contract annexed a Project Management Plan (PMP) of some 42 pages. Unisys argued that any representation in respect of open claims being on-line or as to their retrieval times were withdrawn in point 12 on page 7 of the PMP. Point 12 was simply 'Performance Objectives' under a heading 'Major Gaps Identified'. The trial judge held point 12 did not amount to an express qualification or withdrawal of the representation earlier made. Acting Justice Phillips endorsed all of Justice Hansen's findings. With respect to the argument put by Unisys on the PMP, his Honour held that the words in the contract were vague and imprecise and insufficient to constitute a withdrawal or qualification of representations made by Unisys.

Cross appeal

For the purposes of the appeal, RACV had lodged a cross claim. One of the key claims of the cross claim was that given the time taken by the failed project, RACV had spent a good deal on staff labour which, in the end, was altogether wasted. RACV, because of the complexity of the project, had directed some of its more experienced staff to spend time on the project. In order to cover their absence from normal duties, RACV had engaged additional staff. RACV claimed it was entitled to the cost of either wasted time spent by permanent staff or the cost of additional staff.

At first instance, Justice Hansen had rejected the claim for the cost of additional staff because he was not satisfied in relation to the costs involved. He also refused to allow the claim for $350,000 spent on permanent staff. It was in relation to this latter point that RACV succeeded in its cross claim. Acting Justice Phillips held that these costs were incurred in taking steps which were required because of the misconduct basing the cause of action and were thus fully recoverable by RACV.

Commentary on the Full Court decision

Most of Acting Justice Phillips' judgment involves the review of the facts and an analysis of the trial judge's reasoning with which his Honour overwhelmingly concurred.

While the RACV case is not notable for the law it creates, it is a most extraordinary case. Proceedings were filed by RACV in December 1996 and have thus far taken eight years. The cost and executive time involved in the litigation would undoubtedly have been substantial. Twenty-two witnesses were called at the trial. The Court Book's alone comprised 49 lever arch files.

Given this context, his Honour's comments on Unisys' conduct of the litigation are telling and highlight the perils of an IT supplier doggedly persisting with the defence of litigation taken by an equally determined customer.

First, it is clear that Acting Justice Phillips was in no doubt that Unisys had comprehensively and deservedly lost at trial. His Honour expressed surprise that Unisys 'with a significant worldwide reputation' was prepared to put that reputation on the line, not only during a long trial but also during the appeal which lasted some 10 days.

His Honour also castigated Unisys for its last minute concession that it had failed to perform contractually when it was patently clear to his Honour that the system was a failure. (Up until the earlier stages of the trial, Unisys had maintained in its pleadings that it had not failed to deliver a working system by March 1995.)

His Honour further commented that the denials and stand taken by Unisys on some points of the trial did little to confine the argument sensibly and much too extend it without sufficient warrant. As a consequence, his Honour indicated that he would be willing to consider a submission that Unisys should pay RACV's business costs over and above the usual party/party costs.

While the motives of Unisys' appealing seem questionable, what is clear is that Unisys has had a resounding knockback from the Full Court. Not only has Unisys been severely criticised by the Full Court but it has also been ordered to pay an additional $350,000 in damages and further faces the prospect of paying a greater proportion of RACV's legal costs than would otherwise be the norm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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