Kenman Holdings had claimed that Comhairle nan Eilean Siar gave unfair advantage to an outside competitor in bidding for a contract to run the redeveloped Lews Castle.
Part of the property, which received public funding, is due to open next month as holiday accommodation and a museum.
The company, which runs hotels in Stornoway, was unsuccessful in a legal action raised in 2015 which challenged the council’s tendering of the contract as it was felt that the company had taken to long to bring the action to court.
Three appeal judges at the Court of Session reversed the decision on Friday, allowing the claim for damages to be heard because the company’s arguments are more narrowly focused than were previously set out.
Kenneth Mackenzie, managing director, said the decision will allow the case’s “substantive merits” to be heard.
He said: “During the legal proceedings thus far, the Comhairle have already admitted that some two weeks prior to advertising the Invitation to Tender for Private Sector Partner for the Lews Castle project, they emailed a draft copy of it to a consultant of Natural Retreats for a ‘quiet review” before immediately deleting this email from their system.
“We believe this conduct, on its own, is an actionable breach of procurement rules, quite aside from the many other documented procedural failures we believe we have found.
“The Comhairle now finds itself at the wrong end of a multi-million pound damages claim.”
A spokesperson from the Comhairle said: “This decision was not about the merits of the case and Kenman’s claim for damages will now proceed to be determined by the Court of Session.”
Councillor Angus Campbell, Council Leader and chairman of the Lews Castle Project Board, added: “The Comhairle remains confident that its processes in the awarding of the contract were proper and competent.
“The restoration and development of Lews Castle is hugely popular and has already provided a major economic boost.”