The Supreme Court judgment, handed down today, found social workers owe all children a duty of care - regardless of whether they are officially in care - to protect them from the risk of sexual, emotional and physical abuse or neglect.
The move overrules a previous Court of Appeal decision last year that found Poole Council was not at fault in the case of a mother and her two children - one of whom is severely disabled - being subject to abuse from their neighbours.
The family claimed the council was at fault for placing them next door to a family which, according to the Supreme Court papers, the council knew "had persistently engaged in antisocial behaviour".
The children, one of whom was the subject of a child protection plan, then suffered a series of verbal and physical assaults by the neighbour's children, it was claimed.
The family said they suffered physical and psychological harm and wanted to the council to rehouse them away from their neighbours.
They claimed the council had a "duty of care" under the Children Act 1989, a claim that was rejected by a court ruling in 2015.
The court also rejected the family's claim for damages from the council as compensation as judges agreed it could not be said "that the claimants and their mother had entrusted their safety to the council, or that the council had accepted that responsibility".
Solicitors Simpson Millar, which represented Article 39 and the Care Leavers' Association both of which acted as interveners in the case, said it was a "ground-breaking decision" that clarified the law for councils with regards to their duty of care.
The charities said the family's legal challenge initially focused on the failings of the housing authority rather than children's social care but it was the latter claim that progressed to the Supreme Court.
Carolyne Willow, Article 39's director, said: "Today's ruling clarifies that local authorities can be held to have a duty of care when they are carrying out their statutory child protection functions in respect of children for whom they have not previously accepted responsibility.
"This has very important and welcome implications for children living in a variety of institutional settings and for care leavers," she said.
Peter Garsden, a partner at Simpson Millar, said the ruling could pave the way for many abuse and negligence cases against local authorities to now be brought.
"Whilst this case has been ongoing, many other cases were put on hold, and there were grave concerns that the law could regress significantly - taking us back to an era when social workers were given exemption from blame, and leaving victims with little reassurance that everything possible was being done to protect them from harm," he said.
"This decision affects some of the most vulnerable members of our society and we are delighted that those affected will continue to have access to the justice that they deserve in instances where they are let down by those they have put their faith in."
David Graham, national director of the Care Leavers' Association, said a previous ruling had overturned any legal liability where negligence was found in child protection cases.
"A court ruling that a local authority had a duty of care and acted negligently can give care leavers a real sense of justice and vindication, as well as financial compensation for harm that should never have happened.
"We hope the courts will now quickly deal with the backlog of cases from adults who were failed as children," he said.