The Commercial Court has been told that Carlow County Council gave orders for a building company to construct a relief road around part of the town, even though it did not own all of the land.
Mr Justice Peter Kelly described the situation as 'extraordinary'.
Damages in the case could be as high as €12m.
The brand new road, nearly 1.5km long, was supposed to cost €5.5m and open up lands for development.
Nessleside Builders signed a contract with the council for this road to be completed by next August.
They were on budget and ahead of schedule when the company ran into a huge problem: the final parcel of land was not owned by the council.
Because the land access issue has not been sorted out, the main Carlow to Dublin road is effectively a road to nowhere.
Father and son John and Sean McLoughlin, who control Nessleside, went to the Commercial Court today to prevent the Council from referring their dispute into arbitration.
Their Counsel argued the company would never have started to build the road, if they had known that the Council did not own the final 35 metres of land.
Counsel for the local authority argued, however, that litigation was premature, the dispute was a matter for arbitration, and they would have been well down the road to a solution if talks had started six weeks ago.
However, Mr Justice Peter Kelly ruled that the matters in dispute went well beyond the provisions in what he described as an extraordinary contract which was only two pages in length and not in any standard form.
Dismissing arbitration, Judge Kelly noted that serious claims were being made against the local authority, including fraudulent misrepresentation, breach of contract, misfeasance of public office, conspiracy to defraud and threats by an employee.
The matter comes back before the Commercial Court and Mr Justice Kelly next Monday.
