Dale McAlpine was arrested in Kendal town centre last year and held for questioning at Kendal Police Station.
After being released without bail, McAlpine waited six months for police to inform him he would not be prosecuted.
The Christian Institute has called the incident "a gross overreaction from the police" and supported McAlpine in a claim for wrongful arrest and false imprisonment.
McAlpine, who has been street preaching across the UK for 14 years said: "I believe in the Lord Jesus Christ and His message of salvation and I want everyone to hear about it.
"I took this legal action to help the police realise you cannot arrest people just for preaching the Gospel."
The Christian Institute has dubbed the recent pay out a "positive outcome for Christians across the country".
Simon Calvert, Deputy Director for Public Affairs said: "Our country has a rich heritage of free speech, for preachers and for everybody else.
"This needs cherishing and protecting and that requires the police to actively train their officers to stand up for free speech, including speech they don't like, or that is unfashionable."
The preacher has been involved in a number of similar cases in which he has been arrested and detained for preaching.
Following one incident in Workington town centre in 2010, McAlpine was awarded £7,000 for wrongful arrest, unlawful imprisonment and breach of his human rights.
McAlpine, who says he couldn't have taken this stand without the help of the Christian Institute plans to donate the £4,000 to the organisations Legal Defence Fund "to help Christians to fight for religious liberty."
Stay up to date with the latest news stories from a Christian perspective. Sign up to our daily newsletter and receive more stories like this straight to your inbox every morning.