Two senior judges condemned the Government's "abject" surrender to a "blatant" threat when the Serious Fraud Office (SFO) halted its inquiry into allegations that BAE had made secret payments to Saudi officials in order to secure a series of massive contracts. BAE has always denied any wrongdoing.
Calling on Gordon Brown to hold a public inquiry into the affair, jubilant campaigners demanded the fraud investigation into the £50bn Al-Yamamah deal to sell Tornado and Hawk jets to the Saudis be restarted.
Mr Blair faced controversy in December 2006 when Lord Goldsmith, the Attorney General, announced the investigation had been dropped. Mr Blair warned at the time that threats had been received which indicated that continuing the inquiry would put British lives at risk.
But yesterday, Lord Justice Moses and Mr Justice Sullivan said that the SFO director, Robert Wardle, had failed to stand up to threats from the Saudis.
They said: "The director was required to satisfy the court that all that could reasonably be done had been done to resist the threat. He has failed to do so."
The judgment added: "No one, whether within this country or outside, is entitled to interfere with the course of our justice. It is the failure of government and the defendant to bear that essential principle in mind that justifies the intervention of this court."
The judges added: "On 11 December 2006, the Prime Minister said this was the clearest case for intervention in the public interest he had seen. We agree."
Disagreeing with the Government's argument that the SFO was entitled to "surrender" to the threat, the judges said: "So bleak a picture of the impotence of the law invites at least dismay, if not outrage." They were scathing about the SFO's line that the decision to halt the inquiry was taken independently of the Government. "The more the defendant stresses that he reached a conclusion free from pressure imposed by the UK Government, the more he demonstrates the inconsistency in submitting to pressure applied by the government of a foreign state," the judges ruled.
The no-holds-barred judgment sparked joy last night among the arms trade campaigners who had taken the case to the High Court.
Demanding that the SFO restart its investigation, Symon Hill, of the Campaign Against the Arms Trade which brought the action with the pressure group Corner House, said: "We hope the SFO will reopen the inquiry and we call on Gordon Brown and his government not to stand in the way."
He added: "We are delighted. This judgment brings Britain a step closer to the day when BAE is no longer calling the shots. It has been clear from the start that the dropping of the investigation was about neither national security nor jobs. It was due to the influence of BAE and Saudi princes over the UK Government."
The judgment could require the SFO to reconsider its decision to call off the inquiry although the department is thought likely to appeal. An SFO spokeswoman said: "The SFO are carefully considering the implications of the judgment and the way forward. No further comment at this stage." Downing Street also declined to comment.
Nick Clegg, the Liberal Democrat leader, demanded a full inquiry into the decision to abandon the SFO investigation and warned that the Government's decision had done "untold damage" to Britain's standing.
He said: "This investigation was blocked supposedly to protect our security, but it looks increasingly like it was done to protect BAE sales by appeasing the Saudi government.
"There is now a pressing need for a full inquiry into the SFO's decision to end the investigation and what pressure was brought to bear by the Government."
BAE said: "The case was between two campaign groups and the director of the SFO. It concerned the legality of a decision made by the director of the SFO. BAE Systems played no part in that decision."
Timeline
1985 – Prime Minister Margaret Thatcher agrees first phase of Al-Yamamah arms deal with the Saudi government.
1987 - British Aerospace (later BAE Systems) delivers first aircraft to the Saudis.
1988 – The governments sign the second stage of the deal.
1992 - National Audit Office investigates contract, but its report is never published.
2003 - Allegations surface that BAE paid bribes to senior Saudis through a secret slush fund. The company denies the claims.
2004 – BAE confirms the Serious Fraud Office is investigating its dealings with the Saudis.
2005 - Provisional agreement to supply Saudi Arabia with Eurofighter Typhoon jets is announced by BAE.
1 December 2006 – BAE Systems warns that talks with the Saudis are dragging over the Eurofighter. Its French competitor, Dassault, discloses it is talking to the Saudis over the sale of a rival jet, the Rafale.
8 December 2006 – Lord Goldsmith, the Attorney General, provokes outrage when he announces the SFO probe is being dropped. Tony Blair is said to be behind the move after persuading the SFO the investigation is threatening national security and "British lives on British streets".
September 2007 - Saudi Arabia and the UK agree a deal for 72 Eurofighter Typhoon combat jets.
Yesterday – SFO's decision to halt its investigation ruled unlawful in the High Court.
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