The EU's Court of Justice on Wednesday (3 September) overturned a decision by member states to freeze the assets of Saudi businessman Yassin Abdullah Kadi and the Al Barakaat International Foundation established in Sweden.
The Luxembourg-based court found that EU governments had breached the rights of both parties - added to the United Nations blacklist of terror suspects in 2001 - by not telling them why their assets had been frozen.
It also concluded that they had not been given sufficient rights of defence or to effective judicial protection.
"The rights of the defence, in particular the right to be heard and the right to effective judicial review of those rights were patently not respected," the court ruling said.
Yassin Abdullah Kadi and the Al Barakaat International Foundation are both suspected of supporting terrorism by channeling their funds to al-Qaeda and Ossama bin Laden.
Mr Kadi hailed the judgement as "historic." Speaking to Arab News, he said: "It is also a national victory because my decision to confront these baseless allegations prevented more Saudi businessmen from being blacklisted and, today, I stand vindicated."
The European Commission said it would "work together with other [European] community institutions to find a general framework on how to establish sufficient mechanisms, in which targeted persons can be heard and effective judicial review can be exercised by [European] Community courts," the DPA news agency reports.
It also welcomed the fact the court had upheld the EU's right to adopt "targeted sanctions against individuals."
According to UK liberal Sarah Ludford, a member of the European Parliament civil rights committee, the ruling "marks the coming of age of a European Union, which really does guarantee fundamental rights instead of just talking about them."
"Suspected terrorists must be brought to justice on the basis of a fair trial and normal rights of defence," she said in a statement.
The EU now has three months to comply with the court's decision.Iran precedent
This is not the first bad publicity for the EU's anti-terror list, which was set up in the aftermath of the September 2001 terrorist attacks in New York and Washington.
An EU court has also questioned the 2002 decision to place the People's Mujahadeen Organization of Iran (PMOI) - a Paris-based Iranian opposition group - on the terror register and freeze its assets.
While PMOI claims the court decision means it should be taken off the list altogether, member states argue it is sufficient to inform PMOI why it is on the list with a brief "statement of reasoning."