The council was facing financial ruin after the High Court ruled two weeks ago it would not interfere with an arbitrator's decision to award an estimated €25 million in damages to Uniform Construction.
Uniform's €9.5m contract to work on Limerick's drainage scheme was terminated in 2001 because the council claimed it had failed to complete work on schedule. If the council had been forced to pay the damages, it would have been left in a serious financial crisis.
In addition to the €25m in damages, the drainage work originally budgeted at 8m was completed by another company at a cost of some €20m, bringing the total bill to some €50m (the city's annual budget is about €65m).
But last night it emerged that the Department of Environment is likely to pay the damages and additional construction costs from central government funds.
The council moved to reassure councillors at a closed meeting yesterday that the local authority will not be liable to pay the damages or the extra construction costs.
Limerick city manager Tom Mackey told councillors the local authority had been guided by the Department of the Environment on the matter and that any money paid to the sacked contractor, and to the company hired to finish the job, had been fully reimbursed by the department.
At a meeting behind closed doors yesterday, it's understood he reassured councillors he did not foresee any situation arising where the council would be held responsible for the debts now or in the future.
Uniform maintained its tender was based on incomplete engineering information given by the council.
While tunnelling under the River Shannon, the company said it hit rock of which it had not been advised by the council reports. It was fired one-third of the way through the contract for being behind schedule.
When the dispute was ongoing, Uniform was prohibited from tendering for public contracts, costing it tens of millions of euro.
Last night, a spokesperson for the Department of the Environment said it would make no comment as the matter was in process. He said that some of the figures being mentioned for damages were "pure speculation".