The Government's plans to allow some courts to sit in secret to hear evidence from spies were in crisis last night after the House of Lords inflicted a series of blows to the scheme.
The proposals have provoked a civil liberties storm with critics claiming they will undermine fundamental principles of open justice.
Ministers argue the moves are essential to allow the state to defend itself in civil cases - notably against accusations of being complicit in torture - without having to disclose sensitive intelligence material to claimants.
But Tories joined Labour and Liberal Democrat peers to demand a series of changes to the controversial Justice and Security Bill.
First, they voted by a majority of 100 to allow claimants - and not just the Government - to apply for cases to be heard behind closed doors if they thought secret material could help their case.
Moments later they voted by 105 to give judges greater discretion to sit behind closed doors and by 87 to require judges to balance harm caused by disclosing security information against the open administration of justice.
Lord Pannick, the crossbench peer who tabled the three amendments to the Bill, described the Government's proposals as a "departure from the principle of transparent justice". He said a party in a court case should always have the right to see the evidence against him and the chance to answer it.
Lord Pannick added: "Judicial decisions are respected precisely because all the evidence is heard in open court subject to acceptance and judges give a reasoned judgment which explains their decision."
Ministers believe they are wasting millions of pounds of taxpayers' money on settling claims, some of which may have no merit, because it is unable to contest them as the evidence it would wish to produce is top-secret.
The move came after 16 terrorism suspects, including former Guantanamo Bay detainee Binyam Mohamed, received a multi-million-pound payout last November after they claimed they were mistreated by US and British security and intelligence officials.
Baroness Manningham-Buller, director-general at MI5 between 2002 and 2007, told the Lords that presenting classified information in open court would put the lives of secret agents at risk, while at the same time compromising state-of-the-art technology used by the security services.
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