Ms Kelliher launched defamation proceedings against the Rose Bay private girls' school and two of its teachers over an email sent by head music teacher Mark Grandison shortly after her resignation that described her three-year leadership as "tyrannical".

Social sciences department head June Peake then forwarded the email and a chain of unflattering responses from the recipients to 200 staff.

Ms Kelliher has claimed that the attacks on her tenure have sullied her reputation to the point where she cannot find re-employment as a school principal, and is suing for special damages of up to $2 million.

But both parties agreed at a directions hearing in the NSW Supreme Court on Friday morning that it would be in their interests to mediate the dispute rather than air their dirty laundry in open court, if they can reach an agreement.

Justice Lucy McCallum said it was a case in which the processes of the court would be "destructive to both sides".

"There's not going to be any winners out of a hearing that attracts a lot of media attention, which it will," Justice McCallum said.

Kambala's barrister Clarissa Amato said the school's primary concern was maintaining an "environment of excellence for the girls" and the potential for financial and other damage was considerable.

"It promises to be long, expensive and unpleasant for both sides," Ms Amato said.

Ms Kelliher, 60, resigned as principal of Kambala in April after 80 staff signed a motion of no confidence in her leadership.

The claims and counter-claims contained in documents filed with the NSW Supreme Court contain allegations of dysfunction, bullying, name calling and malice among the senior teaching staff at the harbourside school.

According to Ms Kelliher's statement of claim, the school's financial position had been compromised by fraudulent activity and exorbitant expense policies, with the former principal charging the school for her jewellery, clothing and hair appointments and teachers enjoying international study tours with their spouses that held little value for the school.

She claimed the teachers who sent the emails were motivated by malice and outrage over the positive publicity she received following her resignation "and their spiteful determination to ensure that ... instead she be publicly disgraced".

Mr Grandison did not like her because she had introduced an online payment system for music tuition and rejected his request for a $300,000 Steinway piano, she claimed in the document.

Ms Peake was put out that she had received a warning letter for using an inappropriate nickname for a senior staff member and had to attend a disciplinary meeting for belittling staff and upsetting them with her "intemperate behaviour".

But Kambala argued in its defence pleadings that to the extent the defamatory meanings were carried - that Ms Kelliher was incompetent, unethical, lacked interpersonal skills and had "waged a vicious and tyrannical campaign" against the school - they were substantially true.

Many parents had complained about her, at least 80 staff members had lost confidence in her and many teachers had left.

Ms Kelliher had a reputation among parents and staff for unethical conduct, bullying conduct, a lack of interpersonal skills and creating a culture of fear amongst the staff, the defence pleadings claim.

The matter was adjourned to November 10.