Wandsworth Council in London has given the Serviceteam company 12 months' notice to quit although the contract had five years left to run.
Union officials said the company had failed to empty an average of 100 bins a day and received 800 complaints in one week during July.
Phil Walker, a Serviceteam director, confirmed the company was losing around pounds 1m a year on the contract and had come to a settlement with the council.
A spokesman for Wandsworth Tory group said it was only the second time, out of 110 contracts, that this had happened. "We are convinced that compulsory competitive tendering gives value for money for residents," he said. Barrie ClementReuse content