Two members of the Lagoons Estate Community Association executive committee, Randall Grayson and Ron Ricketts, allege the council storm water management system for the Seabreeze estate is failing and discharging water into the Lagoons Estate.

They allege that the council installed a system costing about $1.5 million despite receiving estimates of between $14m and $30m for a suitable system.

"The estate suffered quite some damage caused by run-off from the April storms, a result it seems of the council's ineffective water management system," Mr Grayson said.

"Our committee has lost faith in the council executive management team and our attempts to engage the councillors to resolve this issue have fallen on deaf ears.

"We want to engage the councillors to negotiate a settlement and avoid additional legal expenses for the ratepayers."

Mr Grayson said the committee had photographic, video and eyewitness evidence showing the council discharging stormwater into the Lagoons Estate in contravention of Supreme Court orders.

A spokeswoman for Port Stephens Council said that because the Lagoons Estate was subject to a legal matter they were not able to comment at this time.