At the start of a test case in the Court of Appeal in London, three judges heard that it revealed "a terrible story" bound to evoke sympathy for the foster family.
Essex County Council and a social worker are appealing against the decision last July of a High Court judge, Mr Justice Hooper, refusing to strike out claims made by the four children. They were sexually abused by a 15-year-old boy fostered with their family for a month.
Lord Justice Stuart-Smith, Lord Justice Judge and Lord Justice Mantell will also hear an appeal against the decision of Mr Justice Hooper blocking a compensation claim by the parents for the trauma suffered after the boy sexually assaulted their children.
Although Mr Justice Hooper gave the go-ahead for the children to claim in negligence, they are appealing against his decision to rule out other areas of their case, including alleged breach of contract.
Allan Levy QC, for the foster family - referred to as the "W" family for legal reasons - told the three judges: "This case raises important issues concerning the duties of the authority and its social worker in respect of the placement of a child with foster parents."
The 15-year-old boy, referred to as "G", was placed with the family in 1993 when the four children were aged between 7 and 12.
The High Court had been told that G had been cautioned three years previously for indecent assault on his sister.
The children in the W family were said to have suffered psychiatric illnesses as a result of what he did to them and the parents were said to have suffered from post-traumatic stress on discovering the nature and extent of G's activities.
Mr Levy said Essex County Council, in its written argument to the court, stated that on any view the case "reveals a terrible story, bound to evoke sympathy for all the W family".
The parents had applied to Essex in about November 1991 to become full- time adolescent foster carers.
They claimed that when they asked about the 15-year-old they were told only that the boy could be a bully and a liar and that his father, a convicted paedophile, had abused him.
The parents say that had they known the boy had gone into care at the age of 12 after abusing his sister they would not have taken him into their home.
Mr Levy claimed that Essex was seeking "blanket immunity". The council contends that the children have "no cause of action" against it.
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