At issue is whether the conversation was private, and whether Mr Key and Mr Banks ought to have reasonably expected not to be overheard.
Justice Helen Winkelmann has reserved her decision until 2.15pm tomorrow.
It is up to the court to decide to make a declaration, and Mr Collins said a court declaration would be inappropriate because police were still investigating and there was a real prospect of prosecution.
He said an independent police should be able to conduct their inquiry objectively, rather than be subjected to a court declaration "designed to have the effect of stifling the police inquiries".
"It is a constitutional principle that prosecutorial decisions are with the police ... The applicant (Ambrose) can make his argument in court if he is charged."
He also disputed the "facts" as outlined by Mr Salmon, saying media had believed they would film inside the cafe and then leave.
"He (Ambrose) appears to be the only person identified who seems to be operating under a different set of rules to anybody else."
Earlier this morning Ambrose's lawyer, Davey Salmon, said that no one was asked not to listen to the teapot conversation, and no was asked not to record it - despite the request to remove recording devices from the table.
He said there were several reasons in favour of providing a declaration, including removing public confusion and misinformation, clarifying a point that may be critical in a future defamation case, and ending what he called "prejudice" against Ambrose.
TV3 lawyer Julian Miles supported Mr Salmon's arguments, and added that publishing the tape was in the public interest.
"There is a duty on the media in these circumstances to bring significant information to the electors ... When you assess whether something is public or private, you look at it through a different prism in the run up to an election."
He said the event was public "political theatre" of which the conversation was the central part.
Earlier this morning the court saw raw video footage from the event.
Mr Salmon said photos and images show a print journalist in the cafe doorway, visible to Mr Banks, and close enough to touch Mr Key on the shoulder through the doorway.
The journalist was later replaced with a cameraman holding a camera.
"In the inside of the cafe, during their discussion and presumably in the line of sight of security staff and administration staff, there was a cameraman filming."
If there was express or implied consent to record the conversation, it cannot be a private conversation under the Crimes Act.
Mr Salmon argued that the cafe was a public place, where no people were told they should move away, and where people walked passed cameras and had their conversations recorded.
He further argued that the communication was intercepted just by having it visually recorded, and that interception did not require a recording device.
"There were people close enough, with or without cameras, ... A reasonable person in that context, in a media storm, may reasonably expect that something may have been picked up.
"Private communications require more privacy than a public cafe with people so close."
But Mr Collins said there was doubt over whether other patrons could have overheard the conversation, and that photos of the journalist next to Mr Key could have been taken before media were asked to leave the cafe.
In the absence of agreed facts, the overriding public interest was in allowing police to go through with their investigation.
Mr Key laid a police complaint over the recording and police are expected to execute search warrants on four media outlets - the NZ Herald, Radio NZ, TV3 and TVNZ - tomorrow.
Ambrose is considering taking a defamation case against Mr Key, senior minister Steven Joyce and the National Party for comments made about alleged criminal actions and comparing the recording to News of the World
He has asked Mr Key for a public apology, which the National Party leader has rejected.
