The University of Canberra is preparing for legal action against the Commonwealth for what it argues is an unlawful cancellation of a $26 million federal grant to set up a Centre for Quality Teaching and Learning.
But Education Minister Christopher Pyne has countered that the funding would have represented a clear waste of taxpayers' money.
The UC is also seeking the payment of $4.4 million in unpaid invoices it sent to the Commonwealth before it received official notification the centre had been axed.
Vice-Chancellor Professor Stephen Parker said the case provided a worrying precedent for other universities who began implementing Commonwealth grants in good faith, only to find themselves cut off without warning.
The new centre was announced in May 2013 by the then-prime minister Julia Gillard as a national institute which would work to improve teaching standards across the country.
UC received the centre when the ACT signed up to the Gonski education reforms, but was, according to the office of Mr Pyne, "offered to the ACT by Gillard Labor as a sweetener for a pre-election education agreement. The centre duplicated facilities already well covered in the ACT".
The Abbott government has since abandoned the Gonski model but did sign off on the first $1 million for the UC project upon winning government.
Moving promptly to set the centre up, UC started an international headhunt and hired half a dozen "stellar academics" on five-year contracts under the six-year funding deal.
UC, in agreement with the ACT government, also proposed that the board be headed by Ken Boston, former NSW director of education and Gonski review panellist. Dr Boston has also been an outspoken critic of the Abbott government's education policy.
Under the terms of the agreement, the Commonwealth had to sign off on the appointment but did not respond to calls from UC from the end of last year. Nor did it nominate its own director to the board, as required under the funding agreement.
After writing two formal letters to the government in April and May, Professor Parker received a response in May this year from Education Department Secretary Lisa Paul saying the project had been cancelled.
"Given the current fiscal environment, the government will not proceed with the Centre for Quality Teaching and Learning," she wrote.
She noted Mr Pyne was "committed to lifting the quality and status of the teaching profession as a whole" but would be assisted in his endeavours by a ministerial advisory group.
Professor Parker said it was difficult to discuss the issue while legal action was underway, but the UC had formally disputed the cancellation and was committed to the ongoing employment of the staff it had hired to staff the centre.
"Our argument is a cancellation clause can only be exercised validly if in good faith, but the government's refusal to co-operate for months before purporting to cancel, knowing that we were doing our best to implement the contract, does not amount to good faith.
"There has been correspondence from us, and since November from our lawyers, but the invoices we submitted before cancellation have not been paid. We appointed an excellent team of staff well before cancellation."
Professor Parker said the issue had implications nationally.
"I think an important underlying issue is that this was a standard cancellation clause you can find in numerous (if not all) funding agreements. If, after receiving an instalment of a grant, and not having been in breach, a grant can be cancelled, who can now rely on the fact that they have won one?"
Meanwhile, ACT Member for Fraser and Labor shadow assistant treasurer Andrew Leigh accused the government of attempted pay-back for Professor Parker's public stance this year against Mr Pyne's proposed university deregulation.
Raising the issue in Parliament on Thursday, Dr Leigh said: "I can't help wondering whether the University of Canberra is being targeted by Minister Pyne, given that its Vice-Chancellor has pointed out some of the risks in the Minister's plans for fee deregulation."
Mr Pyne's office said the contention being propagated by Labor was entirely false.
"The decision to redirect funding was taken in the 2014 budget, the same budget that contained the Higher Education Reform package. When the decision was made the University of Canberra would have been unaware of what the higher education package contained. The government was similarly unaware of what the Vice-Chancellor's views were on the reform package in the budget."
Professor Parker did made some public commentary before the budget which warned the government appeared to be heading down the road towards deregulation.