The Serious Fraud Office is to challenge the ruling that it must rethink the halting of its investigation into a £43 billion arms deals between BAE Systems and Saudi Arabia.

Richard Alderman, the new director of the Serious Fraud Office, said that he would not reconsider the original decision to halt the investigation, nor reopen it pending the appeal to the House of Lords.

Yesterday Lord Justice Moses and Mr Justice Sullivan quashed the SFO’s decision in December 2006 to halt its investigation, and said that in effect the investigation was reopened.

But the SFO director said that no decision would be made until the law lords had ruled on what was a “very important issue”.

He added: “The SFO took the decision to discontinue . . . because of advice there was a risk to UK lives as a result of terrorism. That is a very important issue and should go before the House of Lords.”

This month the SFO suffered a humiliating defeat when Lord Justice Moses and Mr Justice Sullivan ruled that the SFO “unlawfully submitted” to “blatant threats” from the Saudis. The SFO had argued that the inquiry had to be stopped because of a threat to national security and intelligence co-operation.

The case came back before the two judges who had delivered the damning judgment for a decision on what order they would make.

They ruled in favour of anti-bribery campaigners who claimed that the SFO should have continued its investigation into alleged illegal payments to members of the Saudi Royal Family.

Yesterday Dinah Rose, QC, for the campaigning groups Corner House Research and Campaign Against Arms Trade, told the judges that both sides had agreed that the matter should go to the Lords. She added: “There is agreement between the parties that the right belief is that the decision of the director of the Serious Fraud Office should be quashed and the matter remitted for reconsideration. The effect of that is that the inquiry is reopened unless or until a valid decision brings it to an end.”

The judges then gave the SFO permission to appeal to the House of Lords; and ordered that the legal costs of the two groups — an estimated £190,000 — be paid for by the SFO.

Lord Justice Moses said: “We think that as a result of the efforts of the two claimants, an important fact has emerged, namely the specific access given to 10 Downing Street and the threat issued there — ‘drop it or else’ — and it’s that fact which has given rise to the important public issue which needs to be determined, namely, ‘What is the lawful response when such a threat is issued?’

“We do not think that it is right that, in any respect, the claimants should bear the burden of having to litigate that, which they would have to even under a protective costs order.

“We think this is a paradigm case for everyone having to bear the costs of litigating this issue, which relates to the way this country is governed and basic constitutional principles and, in those circumstances, we shall make an order that the appeal should be on terms that the respondent does not seek to disturb the order of costs in this court and should bear the reasonable costs of the appeal, win, lose or draw.”

Richard Stein, the lawyer from Leigh Day & Co who took the case on a “no win, no fee” basis, said: “The court’s approach is refreshing and reassuring — taking account of the relevance of rule of law in this case.”

The SFO investigation arose out of BAE’s £43 billion al-Yamamah arms deal with Saudi Arabia in 1985. In December 2006 Lord Goldsmith, then the Attorney-General, announced that the investigation was to be discontinued after a decision by the SFO director. Tony Blair had told him that the Saudis had privately threatened to cut intelligence co-operation with Britain unless the inquiry was stopped.

Earlier Miss Rose said that the SFO had not sought to suggest that there was any error of law in the court’s judgment, but that it was a case where the public interest required a definitive ruling by the Lords.

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