Judges have ruled that guidance on the granting of legal aid for immigration cases is "unlawful".
The High Court previously said guidance issued by Lord Chancellor Chris Grayling was "too restrictive" and it overturned refusals of civil legal aid in six cases.
The government then appealed against that decision to the Court of Appeal.
Master of the Rolls Lord Dyson has now ruled on that challenge, declaring that the guidance was indeed unlawful.
The Ministry of Justice said it would "carefully consider" its next steps following Monday's ruling.
'Resources not limitless'A spokesman said: "We continue to believe that the exceptional funding scheme is functioning as intended. Its purpose is to provide funding where it is legally needed.
"Legal aid is a vital part of our justice system but resources are not limitless and must be properly targeted at the cases that need it most.
"The system must be sustainable and fair for those who use it and the taxpayers who pay for it."
The government made wide-ranging changes to how legal aid is provided as part of a new Act - the Legal Aid, Sentencing and Punishment of Offenders Act 2012, known as Laspo.
It was intended that the flagship legislation would lead to the legal aid bill being reduced by £350 million a year by 2015. Most of the reforms came into force on 1 April 2013.
The six cases quashed concern the availability of legal aid for immigration cases under section 10 of that Act, which deals with exceptional funding applications.
Announcing his ruling, Lord Dyson said: "Legal aid was withdrawn in a large number of types of case. But provision was made for exceptional case funding by section 10.
"The Lord Chancellor has issued guidance to which those responsible for deciding whether to grant exceptional case funding must have regard.
"The aim of section 10 and of the guidance is that legal aid should be provided where it is necessary to ensure that litigants have effective access to justice as required by the Convention on Human Rights and the EU Charter of Fundamental Freedoms."
Lord Dyson said the court concluded that the guidance was unlawful because "it misstates the effect of the relevant jurisprudence".
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