The National Union of Teachers said the Government should also go back to the drawing board over a new duty on teachers to help heads process their colleagues' applications for the new pound;2,000 threshold pay rise.
But lawyers for the Department for Education and Employment warned that restarting the process would delay teachers' payments by a year.
The union says Education Secretary David Blunkett acted unlawfully in deciding to impose the five threshold standards without proper consultation. Gavin Millar QC, counsel for the union, told Mr Justice Jackson: "There are no lawful criteria for (Mr Blunkett) reaching that decision."
He warned that the new duty on teachers to assess colleagues would create division and conflict in schools.
Mr Blunkett argues in his submission to the court that he has a "general and inherent" power to lay down the threshold standards, which are not contained in teachers' latest pay and conditions contract and were not laid down in statutory regulations before Parliament.
"This is the first time ever that teachers have bee obliged to participate in determining the pay of colleagues," Mr Millar told the court.
"Peer assessment may well involve fellow teachers being asked to assess how the pupils of the assessee are progressing. It needs little imagination to appreciate that it is potentially highly divisive and gives considerable potential for conflict."
Ministers say the duty on teachers to assess colleagues for the threshold is intended only for senior teachers and line managers.
And David Elvin QC, for the Secretary of State, said: "Teachers are already obliged to contribute to the appraisal, and even the appointment and professional development, of their colleagues.
"Suggestions that threshold assessment introduces divisive elements where teachers 'snitch' on colleagues is empty rhetoric. This is not the sea-change the NUT claims it is."
Full consultation had taken place on the standards, and enormous disruption would follow if the court found for the NUT, he warned.
"New standards will have to be produced, forms changed and consulted on, and teachers will have to reapply. The whole process would have to be restarted."
As The TES went to press, Mr Justice Jackson was expected to reserve judgment.