The European Commission suffered a double blow yesterday when the European Court said that it must pay damages to a French electrical company for a botched merger decision and, in a separate case, overruled the Commission’s decision over competition in diamond trading involving De Beers.

Damages of several hundred million euros may now be owed to Schneider after yesterday’s judgment.

The Court of First Instance said that the Commission had shown “grave and manifest disregard” for the limits of its own powers when it blocked Schneider’s €6.7 billion takeover bid for its rival Legrand in October 2001.

The ruling marks the first time that the European competition regulator has had to indemnify a company whose proposed merger it had turned down. It could set a precedent for MyTravel, which is also seeking compensation after its bid for First Choice was blocked six years ago.

In a separate judgment, the court set aside a decision to prohibit trade in diamonds between De Beers and Alrosa, the Russian diamond company. The two companies had notified the Commission in 2002 of a five-year deal, under which De Beers would buy $800 million of diamonds annually from Alrosa. The Commission challenged the arrangement and in 2006 made binding an undertaking by De Beers not to buy diamonds from the Russian firm.

That prohibition was “manifestly disproportionate”, the court said. It found that the Commission had failed to look for alternative solutions and had not given Alrosa the opportunity to argue its case.

In the Schneider case, the court also noted that the Commission had infringed Schneider’s right to be heard before it banned the merger. This prevented the French company from knowing that it would get the green light for the link-up only if it took certain corrective measures.

It ordered the Commission to compensate the French company for two categories of financial losses. The first relates to the costs that it incurred when the European regulators assessed the proposed deal a second time after the court in Luxembourg had annulled its original decision. Schneider will also receive two thirds of the reduction in the divestiture price that it had to concede when it was forced by the Commission to sell Legrand after the merger was ruled illegal two months after it had taken place.

The French company is seeking damages of €1.66 billion (£1.12 billion), but European Union sources suggested that the final figure may be nearer to €400 million.

Ian Forrester, a partner with White & Case, the law firm, said: “This is an immense sum of money compared to what the Commission has had to pay in previous cases. It is also the first time that a merger victim has won and received damages.”

The Commission said yesterday that it would study the ruling before deciding whether to appeal to the European Court of Justice. It also noted that the judges had rejected Schneider’s claim that it had acted in bad faith.

The ruling is not the first time that the Commission has been ordered to pay damages – in the past, for example, it has had to indemnify fruit importers who had suffered because of the illegal way that it had processed import licences – but the judgment breaks new ground. Legal experts suggested that the ruling was unlikely to open the floodgates to other compensation claims. In recent years, the Commission has tightened up its internal procedures for vetting mergers and built in peer reviews.

The special task force has been disbanded and officials are far less likely to turn down mergers. Only two have been rejected in the past three years.

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