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In 2015, the High Court ruled the NI law breached the European Convention on Human Rights by not allowing abortion in cases of fatal foetal abnormality or sexual crime.
The ruling was appealed by the justice department and the NI attorney general.
Northern Ireland's abortion law is much stricter than the rest of the UK.
On Thursday, three appeal judges ruled in favour of the Northern Ireland Attorney General and the Department of Justice that Northern Ireland's abortion law is not compatible with the European convention of human rights.
However, in an unusual move the court said the case should now go to the Supreme Court.
It ruled it was not up to the courts to decide on abortion law but local government.
It said the complex moral and religious questions behind the issue should be determined by a legislature.
The Northern Ireland Human Rights Commission has said it is disappointed by the ruling.
Unlike the rest of the UK, abortion is only permitted in Northern Ireland if a woman's life is at risk or there is a permanent or serious risk to her mental or physical health.
It is unlawful to perform a termination of pregnancy, under section 58 of the Offences against the Person Act 1861, unless on these grounds.
The punishment for breaking the law is life imprisonment.
The original case was brought by the NI Human Rights Commission (NIHRC). It is cross-appealing and has re-introduced all of the original grounds it brought before the High Court.
The court agreed that women's rights to privacy and bodily autonomy under Article 8 of the European Convention on Human Rights were breached.
However, the High Court did not find that the existing abortion law breached Article 3, which protects people from torture or inhuman and degrading treatment, or that it breached Article 14, which covers discrimination.
In January 2016, both the Department of Justice and the Attorney General appealed against the High Court judgment.
The Department of Justice argued there was a lack of legal certainty in it which could lead inadvertently to abortion on demand.
It also argued that the ruling on sexual crime was unclear.
The Attorney General said Judge Horner was clearly wrong in his decision when he said "there was no life to protect".
He also argued that there was no proper basis for a doctor to say a foetus had a fatal abnormality.
The Speaker has selected an amendment to the Queen's Speech relating to access to abortions for women from Northern Ireland.
More than 50 MPs from all the major parties have signed the amendment, co-ordinated by Labour's Stella Creasy.
It calls on the government to allow women in Northern Ireland to have abortions for free in England, instead of being charged as they are now.
A vote on the amendment is likely to be held after 17:00 BST on Thursday.
Earlier this month, the UK's highest court narrowly rejected an appeal by a mother and daughter for women from Northern Ireland to receive free abortions on the NHS in England.
The Supreme Court clarified that restrictions on NHS-funded abortion care for Northern Ireland women are not due to economic or legal constraints.
Rather, they are based on the secretary of state's political considerations and respect for the local assembly.
In a separate case, a judicial review is due to take place in the autumn into the decision to criminally prosecute a woman who allegedly bought abortion pills online for her daughter.
The woman, who cannot be named, is accused of procuring and supplying poison in 2013 with the intent to procure a miscarriage contrary to the 1861 Offences Against the Person Act.
Meanwhile, a cross-party group of MPs has called for the government to fund abortion care in England for women from Northern Ireland.
The group has tabled the motion in an amendment to the Queen's Speech.