The high court ruled that Ed Balls – children's secretary at the time of her dismissal – had failed to give Shoesmith the opportunity to defend herself from criticisms in a specially commissioned Ofsted report.
Balls used the report to support his dismissal of her at a live TV press conference in December 2008. In its ruling the court said: "She was denied the elementary fairness which the law requires."
The court also upheld her appeal against Haringey council, which formally sacked Shoesmith a week after Balls removed her. The ruling said the council's procedures were "tainted by unfairness".
Shoesmith said after the hearing: "I'm over the moon. Absolutely thrilled. I am very relieved to have won my appeal and for recognition I was treated unfairly and unlawfully." But she added that the sorrow of the child's death would "stay with me for the rest of my life".
An attempt by Shoesmith to quash an Ofsted report into the case was rejected, however. The ruling said Ofsted had complied with the requirements of the statute and of the common law.
Shoesmith was challenging a judicial review ruling made last year that cleared the regulator Ofsted, Balls and Haringey of acting unlawfully. Her lawyers had argued there was "procedural unfairness" in her removal from the £133,000-a-year post.
She had claimed that the manner in which she was dismissed was a breach of natural justice and the result of media pressure. She was seeking compensation for two years of lost salary, reinstatement of her pension rights, and a negotiated settlement from Haringey.
The court put off a ruling on compensation for Shoesmith, saying that the issue should be referred back to the high court for "further consideration".
It is understood the current children's secretary, Michael Gove, intends to launch an appeal against the court's ruling.
Shoesmith was sacked in December 2008 after the childcare regulator's report, ordered by Balls after the Baby P case, exposed failings in her department. The 17-month-old boy, since named as Peter Connelly, was on Haringey's child protection register when he died violently at the hands of his mother, Tracey Connelly, her lover Steven Barker, and Barker's brother Jason Owen, in August 2007.
James Maurici, representing Shoesmith, told the appeal court in March that "buck passing" between Ofsted, Balls, and Haringey had led to her being denied natural justice and a fair hearing.
He said Shoesmith had been a highly thought-of public servant with a successful 35-year career, but that she now faced ruin. She had held a number of senior education posts within local authorities and risen through the ranks before taking her post with Haringey in 2005. A year later she was singled out in an Ofsted report for providing "strong and dynamic leadership".
But in 2008, a "media storm" broke over Baby P's death and she became the victim of a witchhunt and political pressure which led to a flagrant breach of the rules of natural justice, Maurici said. He added: "On 1 December 2008, while trapped in her flat by the media, she had the extreme misfortune to see on TV Ed Balls at a live press conference announce he was directing that Haringey remove her from her post 'with immediate effect'." Balls told the press she was "not fit for office", and acted before Shoesmith had seen, or been given a chance to respond to, the report.
Maurici said, although high court judge Mr Justice Foskett had found her sacking lawful in a judicial review ruling in March 2010, he had said he did not think that "any fair-minded person could think that this was a satisfactory state of affairs."
The appeal judges were told of the "catastrophic" personal impact on Shoesmith following Baby P's death. Maurici said she had been unable to find any work since December 2008, experienced suicidal thoughts, and was still regularly hounded and vilified by the tabloid press.
James Eadie QC, appearing for the government, defended Balls's actions to the appeal court, saying urgent action had to be taken following Ofsted's "ghastly findings", which uncovered "dangerous" failings in Shoesmith's department that threatened local and national confidence in effective child protection.
Ofsted chief inspector Christine Gilbert welcomed the ruling, saying: "I am pleased that Ofsted has comprehensively won this case and that the original judicial review judgement in our favour has been upheld in every aspect on appeal.
"Ofsted carried out a robust inspection and came to a sound conclusion based on evidence. On any view, our inspection report was extremely critical and there has been no challenge to the finding that services for children in Haringey were inadequate. The fairness of our process and rigour of our inspection has now been confirmed through the scrutiny of not just one, but two court hearings.
"The most important thing, of course, is that Haringey's children's services are now much improved as a result and that children are better protected."
In a statement responding to the ruling, Balls declared "faced with the same circumstances I would make the same decisions again".
He added: "Ministers need to be able to exercise their legal duties and make judgments in the public interest based on independent analysis and advice. That is what I did - and I am concerned that this judgment will make it harder for ministers to do so in future. That is why it is constitutionally very important that the secretary of state has decided to appeal this judgment."
