The Permanent Court of Arbitration in The Hague has rejected China's claim to economic rights over large areas of the South China Sea, in a case brought by the Philippines.
It is the first time a legal challenge has been fought in the ongoing international dispute in the region.
In the almost 500-page ruling, the court declared China had no legal basis for asserting what it calls its "historic rights" to rich natural resources, such as energy and minerals.
Around $A7 trillion worth of ship-borne trade passes through the area annually.
The court has also accused China of having its boats nearly collide with Philippines fishing vessels, infringing upon the Philippines' sovereign rights and damaging coral reefs.
It says that is a violation of China's obligation to preserve fragile environments.
Philippines foreign-affairs secretary Perfecto Yasay has welcomed the decision.
"The Philippines strongly affirms its respect for this milestone decision as an important contribution to ongoing efforts in addressing disputes in the South China Sea. The Philippines reiterates its abiding commitment to efforts of pursuing the peaceful resolution and management of disputes, with a view of promoting and enhancing peace and stability in the region."
China had asserted ownership, using a demarcation point called the "nine-dash line" on a 1947 map, saying it entitles
China to an almost 85 per cent share of the South China Sea.
In a further blow to its claims, The Hague ruled China's man-made artificial islands in the region cannot extend its exclusive economic zone.
Throughout the case, China has insisted it would ignore the court's decision, boycotting all hearings and arguing the court does not have jurisdiction regarding the matter.
Taiwan has also dismissed the judgment, throwing its support behind China's claim.
China's Foreign Ministry spokesman, Lu Kang, has maintained that same line.
"I should say the so-called arbitral tribunal was based on the illegal action and claim of the Philippines from the very onset. So its very existence is not legitimate. Then all the awards it is to produce will be in vain and invalid."
The decision, while binding, is not enforceable.
The case was originally brought by the previous Philippines government in 2013.
Other countries, including Brunei, Malaysia and Vietnam, also have claims over the region, while recent military activity in the area by the United States has heightened tensions.
The Lowy Institute's Dr Euan Graham has told the ABC, while the ruling does affect Australia, it comes at a tricky time for the government.
"Australia is a party to the same convention. Australia has benefited from the rules-based order which features very strongly in government statements. The problem is we have a Government which has just got barely over the line* with a victory, the last thing on its mind is going to be making firm statements on foreign-policy issues. So there may be a tendency to just manage the risk and take a cautious line."
