Peers delivered a series of humiliating defeats on Wednesday night to government plans to introduce secret courts.
The House of Lords said the proposals were a "radical departure" from the cornerstone of justice.
Ministers want to allow some civil cases involving national security to be heard behind closed doors so sensitive material can be disclosed.
They want to avoid having to settle out of court to avoid such information being exposed. Claimants would not be allowed to hear the secret evidence against them.
The Justice and Security Bill suffered a mauling in the House of Lords as peers voted through a series of amendments to water down the plans.