In one of the biggest setbacks the agency has suffered since its establishment in 1996, a Crown Court judge threw out the environmental watchdog's prosecution against Petrus Oil, the company that owns an oil recycling refinery near Stoke on Trent, Staffordshire, and ordered the EA to pay the company's legal costs.
Petrus Oil is claiming pounds 155,000 - a sum which would dwarf any previous payout made by the EA. However, the agency is disputing the sum and a hearing to decide the final amount to be received by Petrus is expected to be held later this month.
An agency spokesman yesterday declined to comment because a number of issues in the case, including a number of additional charges, remain outstanding.
In a judgment which was made in September but published only on Friday last week, Judge Tonking said that the EA's attempt to prosecute Petrus on environmental grounds was "manifestly unfair and oppressive".
The government quango wanted to prosecute Petrus for the installation of some pipework at its refinery in Burlsem, which was built in August 1996.
During a week-long hearing at Stoke Crown Court last month, the agency argued that it did not authorise the installation of the pipes and that the addition was a departure from the original plans.
However, Petrus responded that the environmental watchdog had been aware of the existence of the pipes and had not raised the matter with the company during a number of inspections it carried out in 1996 and 1997.
Judge Tonking ruled that EA inspectors visited the refinery on a number of occasions between September 1996 and July 1997 to investigate complaints of foul smells coming from the plant.
However, "at no time during that period ... did the Environment Agency mention, or hint at prosecution in respect of the existence of the line [the pipework]," the judge said.
He concluded that, since the EA knew and had "acquiesced" to the existence of the pipeline, "to commence a prosecution ... is manifestly unfair and oppressive".