The council signed a six-year contract with Sita UK Ltd in October 1999, but cancelled it after just two years, claiming the company was in 'repudiatory breach' of the deal.
However, Sita fought the council, arguing that it remained committed to the contract when the council cancelled it without justification.
Mr Justice David Steel ruled that the council had not 'validly terminated' Sita UK's contract by a solicitor's letter in October 2001.
That decision effectively rules out the council's damages claim and means that Sita UK is now free to sue South Oxfordshire for more than£160,000 to cover unpaid invoices and 'deductions' the council made from its contractual payments.
John Randall QC, for the council, claimed Sita UK had given 'varied and endless' excuses for its contractual failures and, by the end of 2000, the company's management had already concluded that the contract was 'seriously loss making'.
But Jonathan Marks QC, for Sita, told the judge both sides were working towards a 'managed' - or 'friendly' - disengagement from the contract after it became clear that the deal was a loss-maker, largely due to escalating labour and fuel costs.
Throughout the contract, Sita had complained that 'unjustified' deductions were being made from its bills to the council.
Mr Justice Steel concluded that Sita 'was not contemplating, let alone concluding, that in the event of failure of the negotiations, it would abandon or refuse to perform the contract.
'It was only too obvious that, to do so, would expose Sita to a large claim reflecting the cost of finding, engaging and paying, on a much more generous basis, a replacement contractor.
'I regard it as substantially more probable that Sita would have accepted the need to perform the contract for another three years and bear the cost. This conclusion is in accord with Sita's status in the industry and the position that it adopted in other loss making contracts.'
The judge acquitted council officers of Sita's claims that there had been a failure by the council 'to comply with their good faith obligations' under the contract.
South Oxfordshire, which also faces heavy legal costs, was refused permission to appeal against the judge's ruling, but still has the right to lodge an appeal application directly with the Court of Appeal.