It may have won the Australian Hotels Association's hotel of the year award in 2005 and 2006 but yesterday the sprawling beachside pub - in the suburb local Aborigines knew as Koojah, meaning "stinking place" - was fighting for its reputation.

Stephen and Jessica Whyte and their sons had been at the hotel more than three weeks ago to watch the NRL grand final. After complaining about several issues to management, staff offered them a complimentary bowl of ice-cream as a conciliatory gesture.

Mrs Whyte says that when she took a spoonful and put it to her lips, she knew she was getting more than gelato and became violently ill. She spat the contents into a napkin her family later sent to the National Measurements Institute, which found it had "properties similar to human excreta".

"It doesn't take much to join the dots," said the family's lawyer, Steven Lewis, who yesterday said the family contacted him on Friday after giving up trying to deal with the hotel.

After extensive stories about the incident appeared in both Sunday papers, the hotel called a media conference, in which its general manager, Tony Williams, read a statement but would not answer questions because it was "a serious legal issue".

"If indeed this allegation is proved to have occurred, we believe it must have been some form of sabotage," he said.

Whether yesterday's ice-cream was an attempt to calm a horrified public or was a regular practice was unclear, as the hotel would not answer questions.

The statement said that when the claim was first made, the hotel "immediately stopped service of the product, quarantined the product and began conducting an internal review to assess whether there was any further evidence of contamination, such as that claimed by the Whytes. There was not.

"We also tried to maintain open lines of communication with the Whytes. However, our discussions ultimately broke down … if we did not pay them up to $1 million."

Mr Lewis said the accusation his client had asked for up to $1 million was "rubbish". This was not a question of money for the family, he said, but rather that they wanted to make sure it would not happen again. "Let me assure you no one ever demanded any money," he said.

The Whytes will today lodge a formal complaint to the NSW Food Authority after the Minister for Primary Industries, Ian Macdonald, said he would allow the Government to investigate the "horrible" incident. He said if it was true, it would be the most deliberate act of "treachery" he had witnessed involving a restaurant and one of its customers.

"This incident would require some hostile act to occur," he said. "I can't see, given the nature of the food business, how this could occur in any other way."

If found guilty, the hotel could face a fine of $275,000.

Meanwhile, in the beer garden, it was just another sunny Sunday afternoon. Bevan Read, at lunch with his wife and three daughters, unknowingly took advantage of the free ice-cream offer. As the girls sat down to their bowls of vanilla ice-cream, a flash of horror passed across their mother's face as she heard the news. But after careful inspection, the girls were allowed to continue to eat.

Mr Read said, "We're pretty impressed they're putting on free ice-cream for the kids," before adding jokingly, "I'm just glad that I'm not having any."

Eddie and Lynne Sulkowicz had brought their granddaughters, Claudia and Alexia Karam, for a meal. They said they would probably still eat there but the girls' mother said they would not be having ice-cream. "At least not chocolate, anyway," Mr Sulkowicz added.