The court found a verdict by a district court judge favouring the project was wrong. The decision will allow a lawsuit against the project to continue.
Campaigners against Cape Wind had sued the project's developer and Massachusetts state officials, claiming utility company NStar (now Eversource) had been forced into agreeing a power purchase agreement (PPA) for the project.
The district court rejected the suit after ruling it contravened the US constitution. But the Court of Appeals has overturned the decision, allowing the lawsuit to proceed.
The Alliance to Protect Nantucket Sound – a fervent campaign group against the project was behind the appeal.
The 468MW project is endangered after the two companies who had arranged PPAs – Nstar and National Grid – cancelled the agreements. The utilities claim Cape Wind had failed to meet agreed milestones as part of the deal.
Cape Wind Associates has rejected these claims. Cape Wind president James Gordon said a "force majeure" clause in the contract meant the milestones should have been extended.