Lawyers for a college denied capital cash accused the further education funding body of "an abuse of power" as it began its claim for compensation this week.
Grimsby Institute of Further and Higher Education applied for a judicial review of the decision not to reimburse it for pound;3.7 million of costs incurred in developing a project that was approved by the then Learning and Skills Council (LSC) in principle, before funding ran out.
If Grimsby is successful, it is expected to put pressure on the Skills Funding Agency, which has inherited the LSC's liabilities, to refund about pound;200 million spent by 66 colleges where projects were halted.
Peter Knox QC, for the college, said: "We say in these circumstances that it was an abuse of power for the LSC not to at least reimburse us for the wasted project funds spent at its encouragement . We got the approval in principle. If we had been turned down at that stage on the basis that it was too expensive, that may have just ended there. But once you've got approval in principle, you can't be turned down at the approval in detail stage on the basis of totally different criteria.
"If the lack of funds was something outside of the LSC's control then we would accept that there might have been overriding reasons in the public interest to turn down the application. But the reason the money wasn't there is indisputably the fault of the LSC."
He outlined how the college had been encouraged to develop a ten-year "masterplan", rather than merely construct a new pound;20 million building.
Jane Lyon, the regional director of the LSC, wrote to the college, saying: "There is an opportunity for FE colleges to obtain funds which may well not be available in the future."
The hearing, at Leeds Administrative Court, continues.