It sounds like he's on-side and pretty vulnerable. This means he can be negotiated with. The downside is that it seems you've done the deal without consulting the experts ! The line is; you'll go quietly providing he provides a decent reference. It doesn't have to be glowing, just that you did a good job and the contract was terminated for economic reasons. If he refuses, don't go mad, agree to go anyway but make it crystal clear that you're not happy with the situation so you want reasons stated in writing - this hints at going for professional advice and they won't want to get embroiled in that. "Economic reasons" give you both a get-out-of-contract-free card, so it's well worth suggesting it.
Whatever happens, there is no chance of you staying because even if you win this time, they will find something else wrong with you, so take the money and get another contract. Depending on how long you've been there, this contract may make no difference to your ability to get the next one. You could always take up some ad-hoc direct work and get references from them instead. Obviously this is all just my humble opinion and the final decision is all yours. Good luck.
PS. As Harry mentioned, there is no guarantee of good advice from this board - and some is downright destructive ! Get yourself down to a good business lawyer.
