Lancashire County Council will challenge a decision by Defra to withdraw an annual grant of £5.99m towards waste infrastructure.
In December, the local authority was notified that the department had terminated its annual payments from July 2014.
A Defra spokesman said: “Ministers have decided to remove central Government funding to the Lancashire County Council waste infrastructure project as they consider the project no longer meets the terms on which Defra agreed funding.”
A report presented to a council meeting said the local authority will ask for a judicial review on the funding withdrawal and was “confident of its case”. However, the council has set aside an amount from reserves to provide cover for its 2015-16 budget.
David Borrow, council deputy leader, said: “Our lawyers have sought counsel opinion and they are saying we are entitled to this money. So we are taking the Government to court over it. This could take a year before it is settled, but we are pursuing it.”
The 25-year PFI contract, which was awarded in 2007, supported the building of two mechanical biological treatment facilities in Thornton and Farington, in partnership with Blackpool Council and operator Global Renewables Lancashire.
In August 2014, Lancashire and Blackpool councils took over the plants from Global Renewables. The original contract envisaged ownership of the facilities being transferred to the local authorities at the end of the 25-year deal.