This paper introduces a novel control method to address lateral stability challenge in distributed driving electric vehicles. By considering inherent time delay and unknown sensor measurement error generated from design, manufacturing, and external disturbances, the proposed approach achieves better robustness. Firstly, we establish a two-degree-of-freedom (2-DOF) dynamic model for lateral motion of an electric vehicle driven by in-wheel motors (EV-DIM). Based on this model, a control system considering time delay and unknown sensor measurement error is constructed. The control system incorporates a controller based on a dual domination gains observer, and its global asymptotic stability is rigorously proved by the Lyapunov method. Numerical simulations and co-simulations via CarSim and Simulink verify the method’s effectiveness. Compared to the sliding mode control, the proposed method shows better performance which indicates this approach promising for enhancing lateral stability of an electric vehicle.