Ministers’ reforms to the £2 billion-a-year legal aid scheme suffered a setback yesterday when the Lord Chief Justice ruled that some of its new rules breached European laws.

Lord Phillips of Worth Matravers was ruling on a challenge in the Court of Appeal by solicitors to a new contract covering civil and family legal aid.

The Law Society of England and Wales, which represents the solicitors' profession, has been battling over the Government’s reforms that are being brought into force by stages.

Yesteday the society claimed “total victory” after the appeal judges ruled that the the Legal Services Commission, which runs legal aid, does not have power unilaterally to amend the contract in the “extreme” way that it proposed.

A High Court judge had ruled earlier this year that the LSC’s unilateral powers to amend the contract were incompatible with some of the transparency rules set by Europe.

Yesterday, appeal judges upheld the Law Society’s appeal over a second breach of the laws and rejected an appeal by the LSC.

They refused permission to take the case to the House of Lords and ordered it to pay the society’s legal costs.

The Court of Appeal, which included Lord Justice Wall and Lord Justice Lawrence Collins, emphasised that the Commission’s powers were extreme.

“Indeed, the power to amend is better characterised as a power to rewrite the contract,” Lord Phillips said.

Des Hudson, Law Society chief executive, said: “The LSC’s right to unilaterally amend the unified contract is severely curtailed, if not destroyed.”

The judgment covers the contract for civil legal aid but Mr Hudson said the LSC would now have to rethink contracts covering criminal work and those for major trials due to come into force in the new year.

“It’s a shame that this has taken a year and huge sums of public money to resolve, money that should be used to increase access to justice,” he said.

“We yet again urge the Government to work with us to try to find a way forward that is both lawful and economically sensible.”

An LSC spokesman insisted that the reforms remained on track. Although the judgment stated that the powers to amend the contract were too wide, that only affected how changes to legal aid could be introduced under existing contracts, he said.

“We had already anticipated this outcome and it does not alter the fact that the legal aid reform programme is going ahead and remains on track to achieve its important goal of continuing to help the greatest number of people possible within a budget that is necessarily limited.”

He added that the appeal judges had recognised that changes to a contract might be necessary and that a power to make them was needed.

It would therefore be looking to develop an alternative provision that was not pen to challenge.

“If this cannot be achieved, we will have no choice but to terminate and re-tender for contracts much more frequently than in the past.”

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