The company was initially given permission by the Planning and Assessment Commission to increase output at the mine.

Wingecarribee Council also supported the mine expansion until it found out about heavy metals being discharged from the mine into Wingecarribee River that were allegedly above accepted levels.

Southern Highlands Coal Action Group employed the services of the NSW Environmental Defender's Office (EDO) to lodge a merit appeal and the court, on Wednesday, upheld the appeal.

Berrima Colliery Operations manager, Stuart Hutchings, said the company would now assess its options.

"The decision is very disappointing and places the future of the colliery in jeopardy," he said.

"Additionally, this decision could place the viability of other local businesses at risk, including Berrima Cement Works."

Berrima Colliery commenced operating in the 1870s and directly employs 40 people.

It is the primary source of energy for the nearby Berrima Cement Works, which directly employs 130 people and has been a large contributor to the local community.

Boral's application was refused by the court on a number of grounds, including traffic noise and dust; inadequate and incomplete data; fundamental issues of groundwater; river quality and ecologically sustainable development.

Cr Larry Whipper, chair of the council's Coal Reference Panel, said the company needed to bring its environmental requirements up to modern standards.

He said no one wanted to see job losses, however, it was a win for the environment and it set a template for future coal mines.

SHCAG convener Tim Frost said the decision should affect Hume Coal's plan to establish a coal mine in the shire.

"The judgement of the court is particularly important because it reinforces the position, where there is a threat of serious or unsustainable environmental damage, that the precautionary principle will be activated," he said.

"Applying this precautionary principle to coal and coal seam gas mining in the Southern Highlands means that Hume Coal must now prove that they will not damage the aquifer.

"As the court has determined that mining at Medway has clearly damaged the aquifer at that location, then this has very clear application to Hume Coal's proposed activity to long wall mine under the Southern Highlands.

"Hume Coal's proposed long wall coal mining activities will also clearly damage the aquifer and this must be prevented.

"Intergenerational equity demands that we do not allow uncontrolled mining to damage our children's heritage.

"The residents of Medway will also be very relieved to know that their living conditions will now not be subjected to the threat of the passage of a coal truck every six minutes.

"Another very good outcome is that the Wingecarribee Shire LEP was instrumental in informing the court as to the wishes of the local community."