Seaborne Freight's £13.8 million contract to run services between Ramsgate and Ostend in Belgium had attracted widespread criticism after it emerged the company had no ships and had never run a Channel service.
He went on to criticise the Department for Transport for taking shortcuts in the procurement process and trying to deny responsibility.
Channel Tunnel operator Eurotunnel, said the contracts, revealed after Christmas, were decided in a "secretive and flawed procurement process".
The department cited the "extreme urgency" of the situation to bypass transparency requirements which would normally have required the publication of invitations to tender.
The government said it had carried out a "competitive procurement process". Deloitte could not make a formal assessment of Seaborne because it had only been incorporated in April 2017, auditors said.More news: Ole Gunnar Solskjaer: There is nothing I can do about Alexis Sanchez
"The department, considering the information it held on the bidders and the due diligence it had undertaken, made a decision to award contracts to all three bidders".
A DfT spokesperson said: "We undertook a competitive procurement process to secure additional ferry capacity between the United Kingdom and the European Union, which is in line with proper procedures". The deal was subsequently approved by the Treasury.
An NAO memo prepared for the Public Accounts Committee said the Department.
The prime minister's official spokesman was later forced to clarify that Mr Grayling had Theresa May's full backing, but many have continued to ask for how long.
"At the time of the award, we were fully aware of Seaborne's status as as startup business and the need for Seaborne to procure vessels and port-user agreements in order to deliver a service", he said. "We have therefore chose to terminate our agreement".More news: Google Fi SIM cards are getting much easier to buy
The emergence of the expenditure appears to contradict Grayling's statement in the House of Commons on Monday, when he said: "We haven't spent any money on this contract".
Responding to an urgent question on the issue from McDonald, Grayling said the Seaborne freight capacity, and deals with the existing companies DFDS and Brittany Ferries, were intended as a contingency to bring key goods into the United Kingdom if there were no Brexit agreement and the Dover to Calais link were congested.
"There is no threat to contracts with DFDS or Brittany Ferries, who will be providing around 90% of additional capacity in the event of no deal".
Hence the general surprise - and no small derision - at this weekend's announcement that the Seaborne award had now been cancelled, leading to multiple calls for Grayling to resign for reasons of incompetence.
The reason given was that Seaborne's backer, Arklow Shipping of Ireland, had walked away from the deal - a claim that has been flatly denied to Seatrade Maritime News, of which more below.More news: Pokemon Go is getting an AR photo mode
"Not a penny of taxayers money has gone to Seaborne", he said.