Jennifer MacPherson, a key stage 1 specialist, was employed at Darenfelin primary school, near Abergavenny, on a one-year fixed term contract in September 1998. The school was facing an autumn inspection.
Mrs MacPherson was poached by the headteacher Richard Southwell while she was working at All Saints primary school, Ebbow Vale, which had been inspected by a team headed by the same lead inspector assigned to Darenfelin.
In August 1999, Mrs MacPherson was dismissed and replaced with a newly qualified teacher, saving the school about pound;7,000.
The Cardiff tribunal found un-animously in favour of Mrs MacPherson, who was supported by the National Union of Teachers. It said: "The recruitment of the applicant to the vacant post had a special importance to Mr Southwell in the context of the school inspection.
"We do not accept that the applicant would have resigned her othr appointment if Mr Southwell had been as explicit as he contends in telling the teacher that the post was strictly for one year and no more."
The school and Monmouthshire County Council claimed that cash constraints and the avoidance of a budget deficit necessitated a reorganisation which led to the dismissal of Mrs MacPherson.
But the tribunal ruled that the headteacher was fully aware of the budgetary issues arising from the appointment.
It also said that the month's delay between the decision not to renew the contract and informing Mrs MacPherson was unfair.
John Sheen, Monmouthshire's assistant education director, said: "We are looking carefully at the ruling. It could have consequences for the termination of all fixed-term contracts.
"Education authorities might need to look very carefully at the wording of contracts, perhaps ensuring a dismissal date is made implicit at the appointment stage."
Mrs MacPherson said she took out the case to prevent other schools taking similar action.