A spokesman for Citizenship and Immigration Minister Chris Alexander says the government is disappointed with the decision and has filed a notice of appeal "to preserve all available options."
Alexis Pavlich says the government is reviewing the board's ruling before figuring out its next steps.
Friday's ruling stated the Treasury Board violated the Public Service Labour Relations Act by imposing conditions in advance on binding arbitration.
But the board did not impose a remedy in the long-running saga that universities and tourism groups say has deprived foreign students and travellers from getting the visas they need to come to Canada.
The decision urges the Treasury Board and the 1,350-member Professional Association of Foreign Service Officers to go back to bargaining to break the impasse.
Pavlich said the government is set on reaching a deal with the diplomats.
"As we have repeatedly stated, the government is committed to finding a fair and reasonable settlement for both employees and Canadian taxpayers. That commitment remains unchanged," he said in an email Saturday.
The union asked the Treasury Board in July to consent to binding arbitration.
Treasury Board President Tony Clement agreed but then insisted on a series of conditions, including taking the union's key demand for wage parity off the table.
The foreign service staff want wage parity with their counterparts in other federal departments, who they say make as much as $14,000 more doing similar work.
The union, which has been without a contract since mid-2011, has been staging rotating walkouts at more than a dozen foreign missions.
It has targeted the foreign travel of cabinet ministers and the processing of visas for potential visitors to Canada.