Mohamet Bici, 27, was shot in the jaw during the July 1999 incident in Pristina, and Skender Bici, 28, says he suffered psychiatric illness as a result of what he witnessed.
Mr Justice Elias ruled that the Ministry of Defence was liable to both men in negligence and, in the case of Mohamet Bici, in trespass to the person.
It was the first claim for compensation by someone injured abroad by British peacekeeping forces.
Damages will be assessed at a later date.
The men’s cousin, Fahri Mohamet Bici, was killed after he had fired an AK-47 rifle into the air from the roof of a car to celebrate a NATO ceasefire between the Kosovo Liberation Army and the Serbs.
He and Mohamet Bici were travelling on its roof and Skender was in the back seat when the soldiers ordered it to stop, and opened fire when it failed to do so.
Mohamet Bici was airlifted to Leeds for medical treatment and both men, who were not in court, are now settled with their families in Britain.
An investigation by the Royal Military Police has cleared the three soldiers involved because of the situation they were operating in.
The MoD, which is considering whether to appeal, welcomed the judge’s finding that the soldiers, members of the Parachute Regiment, were not reckless.
Mr Justice Elias said that it would be wrong not to put the incident in context.
“The British Army can justifiably be proud of the operation it carried out in Kosovo. It helped to bring peace to a scarred and deeply divided community, and will have saved countless lives.
“It displayed professionalism and discipline of the highest quality.
“The soldiers on the ground had to carry out difficult and highly responsible tasks which required a combination of courage and sensitivity.
“But soldiers are human; from time to time mistakes are inevitable, and even the most rigorous discipline will crack. In this case the fall from the army’s usual high standards led to tragic consequences for the victims and their families.
“The army should be held accountable for such shortcomings, even where the victims are from the very community which has benefited so much from the army’s assistance.”
He rejected a claim the soldiers acted in self-defence.