CALMAC has dropped an unprecedented legal challenge against the Scottish Government which owns the Gourock-based ferry operator.

The company was on a collision course with ministers in a dispute over a £450 million contract to run services in the Northern Isles which was controversially awarded to private firm Serco.

CalMac bosses say they won they tender 'on price' and announced they were suing the government.

But Serco, which has a marine services base in Greenock, was named preferred bidder for the lucrative six-year deal in September last year - a month before it was due to start.

The government announced in December that CalMac had launched a legal challenge and the contract had been put on hold.

Now the company has done a u-turn, while defending the stance they have adopted.

Duncan Mackison, chief executive of CalMac parent company David MacBrayne Group, said: "We have agreed to withdraw our legal action regarding the award of the Northern Isles ferry service contract. "We submitted a very strong and competitive bid and have been extremely disappointed by the outcome. "In our opinion we lost the contract because of a very fine line in the assessments of the quality aspects of our proposals.

"We felt fully justified in embarking on this course of action and as directors have a duty to act in the best economic interests of the company, however, we will now be seeking alternative ways to have our concerns addressed."

The government argued that the tendering process was not all about price, with around two-thirds weighted towards cost and a third based on the quality of bids.

Following the withdrawal of the legal action, the work has now been formally awarded to Serco.

Paul Wheelhouse, minister for energy, connectivity and the islands, said: "I'm very pleased these issues have been resolved so that we can now start to focus on the award of the new contract and the benefits it will bring to the communities that are served by these lifeline ferry services."

Serco has been in charge of the NorthLink Ferries contract since 2012 and will formally take on the new six-year extension by the end of March.