The High Court decision overturning the ban on corporations and associations making political donations in NSW could herald a return to the "bad old days" of political corruption and pave the way for a further erosion of electoral funding restrictions, the Greens and a constitutional law expert have warned.

In a judgment that sent shock waves through the political landscape, the court ruled on Wednesday that key changes to electoral funding laws introduced by the O'Farrell government last year are invalid, upholding a constitutional challenge by a coalition of unions led by Unions NSW.

It is a huge win for the union movement and state Labor, which stood to lose 98 per cent of its donors under the laws, compared with 75 per cent of donors for the Liberal Party.

The court found that the provision which prohibited any association or corporation from making a political donation to a State or local election in NSW was invalid because it breached the implied freedom of political communication contained in the Constitution.

In effect, that making a donation is a form of protected political communication.

The court also overturned the section of the laws that placed a cap on the total amount a political party and any affiliated organisation of that party could spend on political advertising and electioneering.

This had meant that anything Labor-affiliated unions spent on political advertising was added to the party's total expenditure, which was capped at $8.8 million.

Crucially, the court rejected the State Government's claim that the provisions were necessary to guard against political corruption in NSW.

Unions NSW assistant secretary Mark Morey welcomed the decision, saying "the court has spoken very loudly to confirm people have the right to come together, to put their money together, to participate in the political process".

The decision effectively opens the flood gates for corporations, associations and institutions of every political hue to once again make political donations in NSW, with the notable exception of property developers, or businesses in the tobacco, liquor and gambling industries which are still prohibited.

Premier Barry O'Farrell vowed to continue the fight against "corruption and Labor's rotten 'decisions for donations' culture".

But constitutional law expert, Professor George Williams from the University of NSW said the High Court's decision could embolden others, including those who remained on the prohibited donors list, to challenge the laws.

"There's quite considerable scope for further attacks on the legislation in the wake of this decision," Professor Williams said.

"[It] could [also] pave the way for challenges to the caps on donations and the limits on electoral expenditure [introduced in 2009 and 2010]. I'm very concerned about that possibility because I think a very clear case has been made reforms of this kind."

Greens Upper House MP, John Kaye said there would now be "a veritable army of corporations lining up to pour money into the coffers of the NSW Liberal Party and the National Party in the lead up to the next state election".

He feared prohibited donors could use the same argument as the unions to return to the political system."It would be a grave tragedy for NSW if the alcohol, tobacco and gambling industries were allowed back into the political system.

The consequences would be a return to the bad old days where corporations could back particularly outcomes with there financial weight.

The Opposition's spokesman on electoral funding reform, Peter Primrose, said the Coalition "wanted to take us down the American path where rich donors dominate the political system".

"The High Court has said no," he said, adding "this decision is a win for freedom of political association. It is a significant embarrassment for Barry O'Farrell but a great day for democracy in NSW."

Unions NSW assistant secretary Mark Morey welcomed the decision, saying “the court has spoken very loudly to confirm people have the right to come together, to put their money together, to participate in the political process”.

He said the laws were more than an effort to weaken the Labor Party, they were "attacking community groups and church groups who dissented to the government's position on a range of issues".

Premier O'Farrell said the High Court's finding that affiliated unions to the Labor Party did not have to come within the party's spending cap was "nonsense".

"Clearly I'm disappointed," Mr O'Farrell said. "The government will clearly now consider its options.

"We will take advice and see what we can do. We've already announced we will be redrafting major legislation for electoral funding over the course of the next year.

"We are not going to be put off in trying to stamp out corruption in this state," Mr O'Farrell said.

"What the High Court has said is that affiliated organisations don't have to come within the spending cap of a political party. That's a nonsense when unions select candidates and determine policy within the Labor Party."

The case was launched by the peak body Unions NSW and five unions in a bid to have the NSW government's donations laws declared unconstitutional.

The laws ban corporations and associations from making political donations in state and local government elections in NSW.

They also restrict how much the Labor Party and its affiliated unions can spend on advertising during an election campaign by counting expenditure by unions against the total amount the party is allowed to spend.

Mr O'Farrell had pitched the laws as an attempt to reduce the influence of donations in NSW politics.

But Labor and the union movement said it was an attack on their ability to contest elections. The unions argued that political donations, including those by corporations, are a form of freedom of expression that need protection.

With Jacob Saulwick