In almost 20 years of amassing evidence on the rights and wrongs of the Balkan wars, the UN tribunal in The Hague has delivered several verdicts shaping modern international law and informing the identities of the countries that emerged from Yugoslavia.

That the Serbs perpetrated an act of genocide at Srebrenica in July 1995 is the biggest. That rape is a war crime and was an instrument of Serbian terror against civilians is another landmark. And the successful appeal of two former Croatian military and police officers will go down as a third.

Until Friday Operation Storm – the military offensive in August 1995 that ended four years of war with the Serbs and gave Croatia victory and independence – had been termed a war crime. The foundation myth of Croatian statehood was sullied.

Generals Ante Gotovina and Mladen Markac were last year sentenced to 24 and 18 years.

Gotovina, the commanding officer of the 10-week military operation, had been on the run for years with the connivance of the Zagreb authorities until they handed over his mobile phone number to international prosecutors, enabling him to be traced to a hotel restaurant in Tenerife. The fugitive held up Croatia's efforts to join the EU for years. Ultimately he was sacrificed in the national interest.

At stake in his trial was much more than the fate of one man. The guilty verdict incriminated the entire 1990s regime of President Franjo Tudjman and destroyed Croatia's founding myth: the liberation war. The key players – Tudjman, his defence minister, Gojko Susak, and the army chief, Janko Bobetko – had died in the meantime and could not face justice. The Gotovina case became a proxy trial of the Tudjman regime.

The guilty verdict found the same regime deliberately plotted a systematic campaign of terror and violence aimed at ridding Croatia of its large Serbian minority, triggering the flight from Croatia of around 150,000 Serbs.

The Serbian insurgency, plotted from Belgrade, had left Croatia crippled and partitioned for four years, the medieval wonders of Dubrovnik battered, the pretty Danube town of Vukovar levelled by relentless Serbian shells. Croats were incredulous at the Gotovina guilty verdict.

Friday's ruling changes all that radically. Resting on an argument as to whether Croatian shelling of four Serb-held towns in the Dalmatian hinterland was lawful or not – whether civilians were deliberately targeted or not — the appeal judges found against the previous prosecution and verdict, a debacle both for the judges in the earlier trial who accepted the arguments and for the prosecution service in The Hague.

Because the appeal judges found that the shelling was not unlawful, they also concluded there was no planned deportation of the Serbian minority and no "joint criminal enterprise" or political conspiracy by a leadership cold-bloodedly planning an ethnic pogrom.

The previous trial heard plenty of evidence to support the planned pogrom, including transcripts of meetings of the Croatian political leadership on the Adriatic island of Brioni plotting the operations, which were strongly supported by the Americans, with retired Pentagon generals and advisers ensconced in the Croatian defence ministry at the time.

The Tudjman regime had been incriminated. Now it is exonerated. The result is joy in Zagreb and rancour in Belgrade. There was also bitterness from the dissenting two judges in the panel of five.

The arguments will rage, but there is unlikely to be another verdict reversing Friday's, allowing Croatia to argue that they beat the Serbs fair and square.