Essex county council faces being sued by BT after it terminated an IT services contract more than three years before it was due to end.
Essex says the BT contract was "not delivering value for money". BT says it is discussing its response with its lawyers, with a view to suing the council for "substantial damages" for alleged breach of contract.
The BT contract was costing Essex more than £30m a year. The council will now bring the work back in-house.
The council is currently in dispute with union Unison over its outsourcing programme.