The group agreed a £650,000 three-year hire deal with the council in 2010 to supply 40 new electric vehicles that it had converted at its manufacturing unit at Possilpark in the north of the city. This included 30 Peugot Partner saloon cars and 10 Peugot Expert people-carriers, all of which were made available to council staff as part of the trial.
Less than a year into the programme, the council exercised a clause that allowed it to terminate the leases of nine of the people-carriers on the grounds that they had not been in working order within the terms of the contract.
Allied maintains that it was not to blame for the state of the vehicles and is seeking six-figure damages over the council's failure to pay around £140,000 in outstanding rental fees.
The group's efforts received a setback at the Outer House of the Court of Session in Edinburgh last month when the court's principle commercial judge, Lord Glennie, found in favour of the council in relation to its lawyers' interpretation of the wording of the contract.
Lord Glennie said: "Although I cannot say that the pursuers' construction is impossible as a matter of syntax, I would require to be persuaded that it was clearly more commercially sensible before I would let it prevail over what I regard as the more natural meaning. I am not so persuaded."
Although this judgment only related to one element of the case, Allied would have been well placed to succeed had the opinion gone the opposite way. The firm intends to lodge an intention to seek a second opinion under appeal at a procedural hearing later this month.
The dispute will be embarrassing for the council, which received much publicity in 2010 for being the only Scottish city to receive the funding from the £25m Ultra Low Carbon Vehicle Demonstration Programme run by the UK Technology Strategy Board (TSB). Participating cities included London, Sunderland, Newcastle, Middlesborough, Birmingham, Oxford, Coventry and Milton Keynes.
As well as paying for the cost of the Allied contract in Glasgow, the £1.8m funding also financed 40 charging points around the city and a wide-ranging study by Strathclyde University of the extent to which the scheme was bringing down council carbon emissions.
The programme was seen as an important step towards weaning Scotland off cars powered by fossil fuels over the next few years.
In 2009, the Scottish Government announced an intention for all public-sector vehicles and 95% of new private-sector vehicles to be low-carbon by 2020.
Few still believe this is possible, but there remain high hopes that the shift will take place, though at a slower pace, after a number of major manufacturers have moved into the market in recent months.
Back when fewer manufacturers were entering the market, Allied spotted an opportunity to convert new vehicles to electric power and set up as a supplier.
Allied managing director Paul Nelson said that the company has since stepped back from the market, at least temporarily, although it still has a number of lease agreements in place including the remainder of the one to the council.
He said: "To be honest, on our production side it's hard enough at the minute to get the vehicles produced that we need to produce for the wheelchair and taxi markets."
The company has added 69 staff this year to take the total to 443, having achieved around 10% growth in pre-tax profits to £1.2m in the year ended April 2013, on an 11% rise in sales to £73.3m.
The company last week signalled an intention to open a chain of mobility solutions stores after receiving a £7m funding package from Bank of Scotland. It opened its first store in the north of Glasgow last year.
Nelson added: "There's a long way to go in the court case. In parallel we are holding discussions with Glasgow City Council."
A council spokesman said: "There is a court action regarding leased electric vehicles which the council is defending."