The Strasbourg judges said the prosecution's use of transcripts of interviews obtained under compulsion by Department of Trade and Industry inspectors investigating the 1986 Guinness takeover of Distillers broke Article 6 of the European Convention of Human Rights, which guarantees a right to a fair trial. Use of incriminating interviews was a "marked departure" from one of the basic principles of fair procedure.
While Britain's judge, Sir John Freeland, endorsed the judgment, the ruling is still a serious embarrassment to the Government, which sought to urge the court to interfere less in UK affairs and which wanted to close the door on the Guinness scandal.
Instead, the ruling has opened the way for Mr Saunders to ask the new Criminal Cases Review Commission to consider sending his case back to the Court of Appeal for what would be the third time.
The inspectors' report into the affair is also expected to be published. SFO investigative powers are less Draconian than those available to DTI inspectors under the 1985 Companies Act. But yesterday's decision could have far-reaching ramifications for other City legislation, including the 1986 Financial Services Act.
Mr Saunders was one of four convicted over an illegal share-support operation which secretly paid out pounds 25m in "success fees" and commissions in return for help in boosting the Guinness share price in the pounds 2.7bn battle for Distillers against the Argyll Group.
Statements obtained by the inspectors, David Donaldson QC and Ian Watt, were to form the cornerstone of the prosecutions for false accounting, theft and conspiracy and were used, the court said, to cast doubt on Mr Saunders's honesty and establish his involvement.
Exactly 10 years after the investigation began, a specially convened Grand Chamber of 20 judges ruled 16-4 that Article 6 protected the right to silence and the right of an individual not to incriminate himself. Whether or not the answers to the inspectors were directly incriminating, they had been used "in a manner which sought to incriminate" and it was no defence for the Government to invoke the public interest in investigating and punishing those responsible for complex corporate fraud.
There was some consolation for the Government, as the court rejected claims by Mr Saunders of pounds 3.6m in lost earnings and pounds 1m for "anxiety, anguish and imprisonment". They also cut his claim for legal costs and expenses from pounds 336,360 to pounds 75,000 after ruling the bulk of the fees had been unnecessarily incurred or were unreasonable. Mr Saunders, who can now command pounds 800 a day as a business consultant, told a news conference he would have been acquitted if the evidence discredited by the Strasbourg court had been ruled inadmissible, saying he now felt "innocent." Mr Saunders was heckled at the London news conference for not answering questions, instead reading out a statement and then referring queries to his adviser George Devlin, at his side. "This doctor's misdiagnosis is a matter for him," said Mr Devlin. "He is not the first doctor to be wrong. Mr Saunders is not a crook. What this is about is the integrity of legal proceedings in Britain."
Later, the former Guinness director walked out of a television interview when a reporter refused to confine himself to one, pre-arranged question and made repeated references to Mr Saunders' medical condition.
The Court of Appeal has twice rejected his challenges to his convictions, although on the first occasion it halved his jail sentence in the light of medical reports of some form of Alzheimer's-type disease.
The DTI and SFO seized on the fact that the court declined to speculate on whether the outcome of the trial would have been different had the transcripts not been used.