diff --git a/cli/compose/template/template.go b/cli/compose/template/template.go
index 14ba09de3599..3bedc79b4504 100644
--- a/cli/compose/template/template.go
+++ b/cli/compose/template/template.go
@@ -72,6 +72,11 @@ func SubstituteWith(template string, mapping Mapping, pattern *regexp.Regexp, su
 func substituteWith(template string, mapping Mapping, pattern regexper, subsFuncs ...SubstituteFunc) (string, error) {
 	var err error
 	result := pattern.ReplaceAllStringFunc(template, func(substring string) string {
+		if err != nil {
+			// A previous substitution failed; don't continue, so that the
+			// error is not overwritten by later (successful) substitutions.
+			return ""
+		}
 		matches := pattern.FindStringSubmatch(substring)
 		groups := matchGroups(matches, defaultPattern)
 		if escaped := groups["escaped"]; escaped != "" {
@@ -89,12 +94,9 @@ func substituteWith(template string, mapping Mapping, pattern regexper, subsFunc
 		}
 
 		for _, f := range subsFuncs {
-			var (
-				value   string
-				applied bool
-			)
-			value, applied, err = f(substitution, mapping)
-			if err != nil {
+			value, applied, subErr := f(substitution, mapping)
+			if subErr != nil {
+				err = subErr
 				return ""
 			}
 			if !applied {
diff --git a/cli/compose/template/template_test.go b/cli/compose/template/template_test.go
index 0b2d463ebbe8..c87ff88df46c 100644
--- a/cli/compose/template/template_test.go
+++ b/cli/compose/template/template_test.go
@@ -132,6 +132,24 @@ func TestMandatoryVariableErrors(t *testing.T) {
 	}
 }
 
+func TestMandatoryVariableErrorsWithOtherVariables(t *testing.T) {
+	testCases := []string{
+		"${UNSET_VAR:?Mandatory Variable Unset} ${FOO}",
+		"${UNSET_VAR:?Mandatory Variable Unset} $FOO",
+		"${UNSET_VAR:?Mandatory Variable Unset} ${missing:-def}",
+		"${UNSET_VAR?Mandatory Variable Unset}/${FOO?err}",
+		"${FOO} ${UNSET_VAR:?Mandatory Variable Unset} ${FOO}",
+	}
+
+	for _, template := range testCases {
+		t.Run(template, func(t *testing.T) {
+			_, err := Substitute(template, defaultMapping)
+			assert.Check(t, is.ErrorContains(err, "required variable UNSET_VAR is missing a value: Mandatory Variable Unset"))
+			assert.Check(t, is.ErrorType(err, &InvalidTemplateError{}))
+		})
+	}
+}
+
 func TestDefaultsForMandatoryVariables(t *testing.T) {
 	testCases := []struct {
 		template string