Families of the Hyde Park bombing victims say they will challenge a decision not to award punitive damages to “mark society’s condemnation” of the atrocity.

Mr Justice Martin Spencer was asked at a High Court hearing earlier this month to award “exemplary damages” because relatives of four British soldiers killed in the atrocity have been denied some “measure of justice, and thereby closure” with no-one ever prosecuted, convicted and punished.

In a ruling on Wednesday, the judge said awarding such damages would require an extension of the law which would be “for either Parliament or the higher courts, and probably the Supreme Court”.

A spokesman for the families said in a statement after the ruling that, if the law will not award exemplary damages in cases such as this, it “urgently needs to be revised and extended to properly compensate victims and survivors of terrorism and to provide a significant deterrent against terrorists and terror groups, and those who finance and support them”.

Mr Justice Spencer said it was the first time the courts in England and Wales have considered the issue of exemplary – or punitive – damages in the context of a civil claim arising from a terrorist attack.

But he relied on a decision of the House of Lords in a case brought in Northern Ireland over the 1998 Omagh bombing, in which the law lords said it was not appropriate for them to “embark upon the radical extension” of the law needed to award exemplary damages.

The judge did award more than £715,000 in damages to Sarah Jane Young, the daughter of one of the soldiers killed in the blast, for losses sustained as a dependent of her father.

However, he dismissed part of her claim for a further £121,500 damages for the psychiatric injury she suffered, despite finding that her post-traumatic stress disorder has “blighted her life”.

It is uncertain whether Ms Young will be able to recover the damages awarded to her, as a court in Northern Ireland was previously told convicted IRA member John Downey transferred his assets to his wife after the launch of the civil claim against him.

Family members of Royal Household Cavalry men who died in the July 1982 blast brought a civil action against Downey after a criminal case collapsed at the Old Bailey in 2014.

A High Court judge ruled last year that Downey was an “active participant” in the bombing and was jointly responsible with others for the attack, which left 31 other people injured.

Squadron Quartermaster Corporal Roy Bright, 36, Lieutenant Dennis Daly, 23, Trooper Simon Tipper, 19, and Lance Corporal Jeffrey Young, 19, were killed by a car bomb as they rode through the central London park to attend the Changing of the Guard.

Seven horses had to be put down and another horse, Sefton, survived terrible injuries.

The legal action was brought against Downey by Ms Young, L/Cpl Young’s daughter, on behalf of herself and other victims’ relatives.

Ms Young will now take her case to the Court of Appeal on the basis the judge’s finding that she was not a “secondary victim” of the blast was wrong and to challenge the decision on exemplary damages.

In the statement, the spokesman for Ms Young and other victims’ relatives said: “Ms Young is pursuing this appeal, not only because she believes that the judge was wrong in dismissing the damage caused to her the day she witnessed the bomb that killed her father but to ensure that terrorists and those that support them will, in future, be properly punished by the courts for their wrongdoing.”

Her barrister Anne Studd QC told the court that, as a four-year-old, Ms Young watched from her nursery window as her father left on horseback, never to return, before hearing the blast and seeing injured soldiers return to the Knightsbridge barracks.

In a statement after Wednesday’s ruling, Ms Studd said: “I am in awe of Sarah Jane and all that she has achieved for victims in bringing this case before the court.

“The Court of Appeal will have to decide whether Sarah Jane as a child victim of terrorism should recover in the same way as an older child with more developed comprehension of the immediate risk to her father would have done.

“It is important that the Court of Appeal consider the position through the prism of a child whose life, as the judge accepted, has been very significantly affected by these events.”

Ms Young’s solicitor Matthew Jury, of law firm McCue and Partners, said: “Sarah Jane’s long brave fight has never been about anything other than the rights of her fellow victims and survivors of terrorism.

“Every day in the life of a victim and their families is irrevocably damaged by physical and mental injury, by the loss of loved ones and all too frequently, the denial of justice.

“Victims deserve truth and accountability. This matter will now progress to the Court of Appeal to ensure that this case and Sarah Jane may leave a legacy that will strengthen and serve the rights of all victims of terrorism.”

Following a two-day trial in December last year, Mrs Justice Yip found that Downey was responsible for moving the car filled with explosives in the days before the attack, after hearing evidence that his fingerprints were found on a parking ticket.

The judge said: “I have found that the defendant was an active participant in the concerted plan to detonate the bomb, with the intent to kill or at least to cause serious harm to members of the Household Cavalry.”

Downey, from Co Donegal, did not play any part in the trial but filed a written defence denying any involvement in the attack.

Ms Studd said he had been notified about the damages assessment taking place, but he has not responded and is not involved in the hearing.

Downey was wanted by police in connection with the blast from May 1983, and he knew he was wanted from at least October the following year, but a decision was taken in 1989 not to seek his extradition to the UK from Ireland.

He eventually faced four counts of murder and doing an act with intent to cause an explosion at the Old Bailey in 2014 in relation to the blast.

However, the trial dramatically collapsed after it was revealed he had mistakenly been given a written assurance he was not wanted in connection with the blast under the controversial “on the runs” scheme as part of the Northern Ireland peace process.

Downey is on bail awaiting prosecution for a car bomb attack which killed two Ulster Defence Regiment members, Alfred Johnston and James Eames, in Enniskillen in 1972.

Belfast Magistrates’ Court heard on Tuesday that his lawyers intend to make an application for that prosecution to be stayed as an abuse of process.