But the extraordinary battle in in a tiny Pittwater hamlet between two couples dating back two decades degenerated into an "Alice in Wonderland" like state and should never have come to court, the presiding judge says.

Jean Luc Clavel and his wife Sarah claimed their former neighbours, John and Kim Savage, embarked on a campaign of intimidation and harassment to force them to leave Great Mackerel Beach, an idyllic village on Pittwater accessible only by boat from Palm Beach and surrounded by Ku-ring-gai National Park.

They also sued the state of NSW, alleging NSW Police conducted malicious prosecutions against Mr Clavel, including criminal charges and apprehended violence orders (AVOs), to help Mr and Mrs Savage achieve their plan.

During a prolonged hearing in the NSW Supreme Court in 2010 – eight years after the case was launched – the Crown solicitors office offered the Clavels a settlement of $200,000 in damages and $400,000 in costs.

But the Clavels pushed on only to lose the case against both the police and the Savages. On Wednesday, Supreme Court Justice Stephen Rothman ordered them to pay both defendants' legal costs, which, when combined with their own legal bills, could reach as high as $1 million.

What makes the case even more absurd is the Clavels left Great Mackerel in 2004 and the Savages moved away in 2001 and they have had nothing to do with each other since.

The acrimony between the families began almost as soon as the Clavels moved into the tight-knight community in 1994. The Corsican-born Frenchman and his English wife, who emigrated from France to Australia in 1985, complained to the local council about illegal building works the Savages allegedly carried out on their property. In 1999 Mr Clavel angered some neighbours when he caused an explosion while burning off rubbish, and residents became further incensed when he asked the council to establish an alcohol-free zone in virtually all public areas of Mackerel.

The complaints also included the number of times one or other neighbour mowed or raked the grass, the number of times a dinghy was driven up and down the water adjacent to the beach when the other family was partying, and a dispute over the escape and hunt for a pet rabbit.

"The evidence as to the pet rabbit was adduced during the 10th day of the hearing … at which I remarked that the case was becoming more like 'Alice in Wonderland'," Justice Rothman said in his judgment.

"At that time, it was the chasing of the rabbit that triggered the analogy but no less relevant was the growing feeling that if all involved in Great Mackerel were not mad, the evidence was certainly giving indictions of it."

At one stage almost 20 AVOs were sought both against and by the Clavels. Two officers from Broken Bay water police applied for AVOs, complaining Mr Clavel had a history of threatening violence and their jobs. Police called the mental health crisis team to assess Mr Clavel's mental state. Mr Clavel was also charged with assaulting a 10-year-old boy, malicious damage to property, resisting arrest and numerous breaches of AVOs. The matters took up dozens of days in the local court and all the charges and orders were eventually dismissed, dropped or mediated.

Justice Rothman identified four incidents in which Mr and Mrs Savage engaged in "wrongful conduct" towards the Clavels, but they were not enough to establish the unusual tort of intentional infliction of emotional distress or harm, including psychiatric injury, he said.

In January 2000, Mrs Savage was hanging out the washing when Mr Clavel allegedly undid his zipper. She yelled that he was a "sick man" and asked whether he had taken his medication. Justice Rothman found her behaviour was a reaction to Mr Clavel's suggestive conduct and wasn't done with the intent to cause physical or psychological harm.

He also found Mr Savage threw stones onto the Clavels' roof, shone a laser beam into their lounge room and abused Mr Clavel during an argument, but none of the behaviour was enough to cause them psychiatric injury.

In dismissing the case, Justice Rothman said: "A  neighbourhood dispute of this kind, no matter how serious, that does not involve continuing rights or relationships, cannot justify the costs involved in this litigation".