In a case seen as a test of China's rising power and its economic and strategic intentions, the Permanent Court of Arbitration has ruled against China.
The court ruled China has breached the Philippines' sovereign rights by endangering Philippine ships and fishing and oil projects.
It says the 1982 UN Convention on the Law of the Sea supersedes China's 69-year-old claim to roughly 85 per cent of the disputed territory.
And it says China cannot create its own territory in the South China Sea by building artificial islands.
In Australia, Foreign Minister Julie Bishop says it is an important test case for China's ambitions to become a world leader.
