The Department for Transport (DfT) said in a statement: "Following the decision of Seaborne Freight's backer, Arklow Shipping, to step back from the deal, it became clear Seaborne would not reach its contractual requirements with the government".
To recap, the Seabourne contract was one of three totalling £108m announced in December, created to spread the freight load away from Dover-Calais in the event of a "no deal" Brexit that risks causing "severe congestion" around Dover for up to six months, the United Kingdom government warned.
"The department, considering the information it held on the bidders and the due diligence it had undertaken, made a decision to award contracts to all three bidders".
He said Mr Grayling ignored warnings from MPs and industry, also claiming the Department for Transport "took shortcuts" in the procurement process with Seaborne Freight. The deal was subsequently approved by the Treasury.
The department insisted on conditions in Seaborne's contract requiring it to meet milestones in its preparations by specific dates.
The chairwoman of the public accounts select committee, Meg Hillier, said the scrapping of the contract raised "serious issues" to be discussed at a meeting on Wednesday with DfT officials.
Asked whether Mr Grayling had the PM's confidence, Mrs May's official spokesman told a regular Westminster media briefing: "Yes".
"At the time of the award, we were fully aware of Seaborne's status as as startup business and the need for Seaborne to procure vessels and port-user agreements in order to deliver a service", he said.
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"When it became clear that it would not reach these requirements without the continued support of Arklow Shipping, the Transport Secretary chose to terminate the contract".
In the Commons, McDonald said he wanted to know what other public money had been spent, for example on preparing the port of Ramsgate.
He said the third, Seaborne Freight, "apparently meant to do so" before the "collapse" of its contract with the DfT over the weekend.
Hence the general surprise - and no small derision - at this weekend's announcement that the Seaborne award had now been cancelled, leading to multiple calls for Grayling to resign for reasons of incompetence.
He added: "We are already in advanced talks with a number of companies to secure additional freight capacity, including through the port of Ramsgate, in the event of no deal".
"There is no threat to contracts with DFDS or Brittany Ferries, who will be providing around 90 per cent of additional capacity in the event of no deal".
While he could not initially say Arklow was involved for commercial reasons, Grayling added, its support "provided confidence in the viability of this deal".
Mr Grayling said the two alternative North Sea options to Seaborne Freight are longer routes which would be "more expensive" but they have been "in reserve all along".
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