Nova Scotia taxpayers are on the hook for millions of dollars to cancel a taxpayer subsidy to Bay Ferries Ltd.

The provincial government must pay $3 million to the company because it cancelled a subsidy last month to keep the CAT high-speed ferry running between Yarmouth and Bar Harbor and Portland, Maine. The company had wanted at least $6 million from the government to continue the seasonal service.

The existence of the penalty provision was revealed after the weekly cabinet meeting in Halifax.

"Maybe I would have negotiated something differently," Economic Development Minister Percy Paris said Thursday.

"I couldn't quite understand why we would have agreed, as a province, to give somebody money for not providing a service to the province of Nova Scotia. Some might consider that as being rewarded. I mean, it puzzled me."

But, Paris said the government will honour the agreement negotiated with the previous Progressive Conservative government.

"We have no choice," he said.

The province will have to make its first payment of $500,000 by April. The amount owing will be cancelled if Bay Ferries sells the CAT.

Over the past two years, the Nova Scotia government has put $18.9 million into the ferry service to keep it afloat.

Mark MacDonald, president and CEO of Bay Ferries, told CBC News that the $3 million termination payment was put in place to protect his company.

"This provision was inserted to protect our company from a situation that has, in fact, transpired; where for policy reasons the government decides to terminate the agreement," MacDonald said in an interview from Sydney, Australia.

"We are left with an asset in which we have a huge investment and cost to maintain. This agreement is to protect our company from losses incurred during the period we redeploy the vessel. This indemnifies the company for our losses. That is what it does."

MacDonald said when Bay Ferries negotiated with the provincial government in the fall of 2008, the company wanted a two-year agreement "so we could have stability."

Bay Ferries wanted the agreement to run from April 1, 2009, to March 31, 2011, MacDonald said, so it could assure companies, such as motor coach companies, that it would be around for at least two years.

"The government was not willing to do that. As a result, we reached a compromise," MacDonald said, which was inclusion of the termination provision.

Tory MLA Chris d’Entremont defended including the termination payment in the contract with Bay Ferries.

"It was for the shutdown costs of the ferry terminal, the selling of the boat, the severances paid to the people who are no longer employed by Bay Ferries," he said.

But Liberal Leader Stephen McNeil blames the NDP, arguing the $3 million could be used to keep the ferry service running.

"It’s been our position from the beginning that this government overreacted. This government should have waited for the people of southwestern Nova Scotia to complete that transportation study," he said.

A federal study on transportation needs in southwestern Nova Scotia, is due out in March.