The bitter dispute between them led to a public meeting in 2008 and "caused the Rai Valley community to become deeply divided".
"Mrs Leov's commitment to the library blinded her ability to properly understand her duties and responsibilities to Mrs Newton and the board," Judge Collins found.
"Mrs Newton, on the other hand, was firm in her determination that school staff comply with her lawful instructions.
"Ultimately, both Mrs Newton and Mrs Leov became tragic victims as they sank deeper into the quagmire of their dispute."
Newton brought the defamation claim in 2012 against Faye and Bernard Leov and Susan Dunn, a writer the Leovs agreed to pay $27,000 to write a book about workplace bullying based on Faye Leov's experience.
After consulting the Leovs, Dunn sent letters in September 2012 to Rai Valley residents, a local newspaper and others, including the Bishop of Nelson, seeking informants to be interviewed about the case.
The letters alleged that the case involved "a ruthless and unwell saboteur" who, "often disguised as someone doing good, literally sacrificed the wellbeing of your children and numerous fine teachers to satisfy her own appetite for controlling, degrading and breaking human life".
"This appears to be one of the most extreme cases of a workplace/community bully to come to light in New Zealand," the letters alleged.
In 2014 Dunn stated in a memorandum to the Court that she had been "misled", and agreed to provide a public apology and retraction.
However the Leovs defended the claim of defamation on the grounds that they did not write the letters, that the alleged facts in the letters were true and that the other contents of the letters were "honest opinion".
The judge found the Leovs were jointly responsible with Dunn for the letters because Dunn "was acting as the agent of Mrs and Mr Leov".
Faye Leov gave evidence that she was reduced to "tears and shaking" after a meeting in November 2006 in which Newton accused her of "sneaky" behaviour about new computers and software for the library. Newton denied this.
Leov engaged a lawyer to lodge a personal grievance claim against Newton.
The next month, Newton proposed to reduce Leov's teaching hours, saying this was "caused solely by annual management decisions to meet student needs" and "was unrelated to the dispute between herself and Mrs Leov".
Early in 2007, Leov said, Newton "froze" the library budget. Newton said she simply asked Leov not to spend school funds on the library while Newton was overseas.
In June 2007 Newton wrote to Leov detailing five concerns including failing to seek leave before closing the community part of the library for half a day to attend a funeral.
Teachers and other members of the community gave conflicting evidence supporting and opposing Leov's claims Newton bullied her.
The judge concluded "Mrs and Mr Leov have not established on the balance of probabilities that Mrs Newton bullied Mrs Leov". The defence of truth therefore failed.
He found most of the statements described as "honest opinion" also failed because they were based on unproven allegations of facts.
He has ordered the Leovs to write to everyone who received Dunn's letters, and to publish public notices in two local newspapers, acknowledging the statements in Dunn's letters "were not true and made without any proper basis", apologising to Newton, and accepting "the actions of Mrs Newton about which they had complained were the reasonable and proper actions of a school principal with management responsibilities".
He has also ordered that if the Leovs fail to comply with that order, they must pay Newton general damages of $100,000.
The Leovs' lawyer Christopher Griggs said the Leovs were still considering the judgment.
"The legal issues are complex so they need to take a bit of time to consider the decision and decide what to do from here," he said.
