The Nelson Bay legal case had been seen as a "legacy issue" from previous councils dating back to the 1990s, but decisions made after a new council was elected in 2017 meant "this is no longer a legacy issue", Ms Washington said.

"The council has a responsibility to minimise the cost to ratepayers of this debacle. There is a responsibility on the current mayor to state the actual and future costs to the council, and ultimately ratepayers."

Ms Washington said an independent tribunal's rejection of council's proposed rates hike on Monday and confirmation the Lagoons legal case will continue into 2020 "gives ratepayers little confidence the council is managing its finances well".

The Independent Pricing and Regulatory Tribunal rejected the council's bid to raise rates by 69.5 per cent over seven years because it was "not clear the additional revenue is needed to meet infrastructure backlog or renewal requirements".

A councillor who did not want to be named said the Lagoons Estate legal case, which returns to court in February, 2020 where the council will fight a multi-million dollar damages bill, was "the number one threat facing Port Stephens Council at the moment" because councillors did not know "what our exposure is".

Lagoons Estate developer David Vitnell initiated legal action against the council in 2015 alleging work it had carried out more than a decade ago failed to comply with a 2006 court order that the council stop the diversion of stormwater from roads and a nearby estate on to the Lagoons Estate.

In May, 2018 the council and Mr Vitnell consented to orders on the eve of a NSW Supreme Court hearing into the case. The council agreed its works had failed to prevent stormwater "in excess of the natural flow" from entering the Lagoons Estate site in 2015, 2016 and 2018, contrary to the 2006 order.

Justice Nigel Rein's consent orders included that the stormwater "constitutes a continuing nuisance for which the defendant (the council) is responsible".

The orders noted Mr Vitnell agreed not to seek an order for damages in excess of $1.5 million "in consideration of the defendant not contesting liability in nuisance as reflected in these orders".

Mr Vitnell is claiming higher damages after reports showed construction costs for the 50-home stage three of the estate affected by the stormwater issue had significantly increased between 2015 and late 2018.

Former Port Stephens councillor Geoff Dingle, who was criticised for arguing the council had to negotiate and settle the Lagoons case over a number of years, said the council "just doesn't get it".

"They're just not taking responsibility for the position they've put themselves and the ratepayers in. They just keep digging the hole deeper and deeper," Mr Dingle said.

The council questioned a Newcastle Herald article on Tuesday saying the council had racked up $2.779 million in legal expenses in 2018 and was prepared to pay another $1.825 million in legal costs in 2019 after the May, 2018 consent orders in which it accepted responsibility for up to $1.5 million in damages.

The council said its total legal costs as outlined in its 2017-18 annual report were $2.779 million which was "inclusive of costs incurred through all legal proceedings and additional fund provisions for legal matters".

But it did not respond to Herald questions about why a council executive told an open council meeting on November 13, 2018 that the $2.779 million was an increase on the average annual legal expenses of about $650,000 and was "in relation to an on-going legal matter".

The council also did not answer questions about whether the $1.825 million in legal costs provisions added at the end of 2018 was in response to the May, 2018 consent orders in which the council agreed it was liable for up to $1.5 million in damages.

It also did not answer questions about whether $272,955 attributed to the Lagoons case in volume one of the 2017-18 annual report was in addition to the Lagoons case portion of the $2.779 million legal expenses recorded in volume two, but where the Lagoons case was not identified.

On Tuesday veteran Port Stephens councillor and former mayor John Nell referred to the Lagoons Estate case as "a bit of a tragedy".

"We should have bought the land for $8-10 million years ago and we would have saved ourselves and the community a fortune," Cr Nell said.

"My gut feeling is the total cost is about $15 million. I'm not even sure of the details of the argument at the moment. There's always another argument. It's totally bizarre," he said.

Councillor Paul Le Mottee said councillors were advised last year that an agreement had been reached between the two parties and a settlement had been finalised, but they were later told the council and developer are back in court next year and the matter remains "on-going".

"I do agree council should at some point in time publish a full explanatory document about what this has cost," he said.

Councillor Jaimie Abbott said she was "quite in the dark" because she had missed briefings after the birth of her child late last year.

"As far as the legal briefings on this matter I haven't personally been briefed," she said.