You should have got what you wanted (domain transfer) before the question of his contract even came up. After clearing it first, I would have said someone highe

You should have got what you wanted (domain transfer) before the question of his contract even came up. After clearing it first, I would have said someone higher than you (ideally having recently joined the organization) found out and made it a requirement that all domain names are owned by the organization. That way the freelancer wouldn't feel nearly as personally threatened. Only then do you end the contract. (Kind of scary that the org didn't have a copy of his contract on file, though. Sounds disorganized.)