Groups including environmental and aboriginal challengers say a joint federal-provincial panel didn't complete its assessment of Muskrat Falls and that its work can't lawfully support any approval from the federal government.
Lawyer Lara Tessaro, representing Sierra Club Canada and Grand Riverkeeper Labrador, said outside court that the panel failed to completely study the need for the dam and power station or possible alternatives.
In the absence of a fuller analysis to justify Muskrat Falls, "we say that the federal government should not be allowed to issue any permits or the loan guarantee for the project," she said before the three-day Federal Court hearing started.
A judgment is not expected for several weeks or months.
"In my view, it would be a shocking thing for the province to sanction the project while the legality of its environmental assessment is before the court," Tessaro said.
In response to an interview request Monday, federal Natural Resources Minister Joe Oliver's office sent an emailed statement.
It said: "Our government reviewed the final environmental assessment and agrees with the recommendations."
But the statement reaffirms Ottawa's commitment to Muskrat Falls as "an important green energy, job-creating initiative for the Atlantic region" and says "we continue to work with our provincial counterparts towards a loan guarantee."
The provincial Progressive Conservative government is waiting on this federal support before it officially approves the development that's expected to cost at least $7.4 billion.
Premier Kathy Dunderdale has been saying for weeks that the loan guarantee is imminent. On Monday, she told reporters at the legislature that talks have not stalled.
"We're working on it every day and phone calls are flying back and forth, and (there are) lots of trips to Ottawa and back."
Dunderdale blamed any delay on the tedium of translating agreements in principle into binding legal language.
"When it's done, it will be done."
Crown corporation Nalcor Energy's plan with private Nova Scotia utility Emera (TSX:EMA) is to bring hydro power from the lower Churchill River in Labrador to Newfoundland and Nova Scotia using subsea cables. The project has been endorsed "using the best utility practices in the world," Dunderdale has said.
But the joint environmental review panel acknowledged in its August 2011 report that damage to fish and other wildlife habitat would be extensive.
It concluded that "Nalcor's analysis, showing Muskrat Falls to be the best and least-cost way to meet domestic demand requirements, was inadequate," and it recommended "a new, independent analysis based on economic, energy and environmental considerations."
Tessaro says these are the kinds of gaps in knowledge that should be filled in a more complete environmental assessment of the project.
Dunderdale has dismissed the province's Public Utilities Board from any further review since it refused last spring to endorse Muskrat Falls as the cheapest option, saying it lacked time and updated documentation.
She has also deflected critics' calls for an alternate regulated review, saying global energy consultants paid by her government have deemed Muskrat Falls the best choice to meet future power needs.
Todd Russell, president of the NunatuKavut Community Council representing the Inuit-Metis of southern Labrador, says the province has failed to adequately consult his people or include them in Muskrat Falls benefits.
"We're asking the court to force the panel to complete its assessment," he said from Ottawa as the hearing was about to begin. "And we're asking the court to order that the federal government not issue any loan guarantees or any federal permits until the panel does its work."
Provincial Natural Resources Minister Jerome Kennedy, a former lawyer, said anyone can take a case to court.
"But we have to be especially skeptical of some of these groups who, if you allow them to shut down projects, will simply bring you to court all the time. This case is now before a judge, a judge will make a determination and we will abide by whatever determination is made.
"But ... unless the judge rules that the matter has to go back for a hearing, or an injunction is in place, we will continue to make our decision based on the information we have before us."