A High Court judge ruled there was no reason in law why closed hearings should not be used in the damages case, even though it had never been used in such a case before.
The judge said the "closed material" procedure entitled the defendants not to disclose matters to the claimants or their lawyers where disclosure would be contrary to the interests of national security, the international relations of the UK or in any other circumstances where it was likely to harm the public interest.
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The government is arguing for a system similar to that used in hearings for control orders which was dismissed by the House of Lords earlier this year after they ruled it breached the suspects’ human rights if they were not allowed to hear evidence against them.
Special advocates representing the claimants are given access to closed material but are not allowed to communicate its contents to their clients.
The claimants had argued that a "public interest immunity" (PII) test should be applied, balancing the public interest in non-disclosure against the interest in the administration of justice.
If a document was covered by PII, it could not be used by either party.
But the judge said the higher courts had held on many occasions that the courts had power to appoint a special advocate in exceptional circumstances and as a last resort.
Mr Justice Silber said he was deciding a point of principle and no decision had been made on whether the procedure should be adopted in the case.
The claimants are now taking the issue to the Court of Appeal.
The seven are Binyam Mohamed, Moazzam Begg, Martin Mubanga, Omar Deghayes, Richard Belmar, Bisher Al Rawi and Jamil El Banna.
The men allege that MI5 and MI6 were guilty of aiding and abetting their unlawful imprisonment and extraordinary rendition to various locations around the world, including Guantanamo, where they were subjected to inhuman and degrading treatment and torture.
Their claims are contested by the intelligence services and by Attorney General Baroness Scotland, the Foreign Office and the Home Office.
Sapna Malik, partner at law firm Leigh Day, representing the claimants, said: "The point of principle is hugely important, further tipping the scales away from an equality of arms in legal claims against the state, and we will be vigorously appealing against this decision in the Court of Appeal and, if necessary, all the way up to the Supreme Court."
Amnesty International expressed "deep disappointment" and said such a degee of secrecy had never before been allowed in a civil case.
Campaigns director Tim Hancock said: "Today the court has missed a crucial opportunity to uphold human rights and the rule of law.
A Home Office spokesman said: "The Government welcomes the High Court's decision that it is lawful and proper for a court to order closed proceedings in a civil claim for damages allowing sensitive evidence, such as intelligence material, to be considered by the court.
She said the procedure would “strike the right balance - protecting the wider public interest and ensuring national security is not harmed whilst allowing cases to be tried fairly."