The Northern Secretary's appeal over the appointment of two Orangemen to the Parades Commission was upheld by a 2-1 majority decision in the High Court in Belfast yesterday.
The decision means Peter Hain is now free to reappoint David Burrows and Don MacKay, but such a move is bound to outrage nationalists.
Lord Chief Justice Sir Brian Kerr and Lord Justice Campbell upheld Mr Hain's appeal, but it was dismissed by Lord Justice Nicholson.
Sir Brian said NIO officials were not under an obligation to consider whether to target residents' groups as a counterbalance to the letter sent to the loyal orders, the single ground on which Mr Justice Morgan ruled last month in favour of the judicial review brought by Garvaghy Road resident Joe Duffy.
Ruling that the treatment of residents' groups was not less favourable, Sir Brian said the purpose of sending letters to the Orange Order, Apprentice Boys and Black Institution was to publicise the appointment process and to secure applications from a wide range of people.
It was not to confer an advantage on a particular group nor to place members of loyal orders in a superior position.
Breandán Mac Cionnaith, of the Garvaghy Road Residents Coalition, said afterwards: "We will now consult with our legal advisers to consider taking the matter to the House of Lords."