The High Court in London ordered the compensation be paid to Hanningfield, 72, for an arrest that took place just days after his release from serving nine weeks of a nine-month prison sentence for false accounting, The Daily Telegraph reported.
Essex police denied that Hanningfield's arrest, detention and search of his home in September 2011 were unlawful. They said the arrest was part of a second investigation into expenses when the Tory peer served as leader of the Essex County Council.
Hanningfield, who was not in court for the ruling, said officers did not have reasonable grounds for believing his arrest was "necessary" under the terms of the Police and Criminal Evidence Act of 1984.
The justices ruled that the requirement of "necessity" as laid down by Parliament had not been met.