Mostafa Azimitabar, a Kurdish Iranian refugee, launched a lawsuit against the federal government last year, after being detained inside two Melbourne hotels for 14 months.
He tried to arrive in Australia by boat in 2013 and was detained on Christmas Island before being brought to the mainland in November 2019 to receive psychiatric treatment.
Instead of being transferred for treatment he was detained at the Mantra Hotel for 13 months and the Park Hotel for one month before being released on a bridging visa in January 2021.
Mr Azimitabar's lawyers argued his detention and the Commonwealth's expenditure to keep him at the hotels was unlawful and not permitted under the government's executive powers.
But Justice Bernard Murphy dismissed the landmark case on Thursday.
He found the immigration minister had the power to approve of hotels being used as immigration detention centres.
Justice Murphy noted he did not want his decision to reflect his approval of hotels being used as makeshift detention centres, with limited fresh air or sunlight.
"I can only wonder about the lack of thought, lack of care and humanity in detaining a person with psychiatric and psychological problems in hotels for 14 months," he said.
"As a matter of ordinary human decency, the applicant should not have been detained for such a period in those conditions."
Azimitabar was supported in court by his friend, activist Grace Tame.
A dozen refugee activists gathered outside the court after the decision was handed down, chanting: "Justice for Moz, justice for refugees".
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