Europe's highest court has ruled the Government does not have to put out to tender a €52 million annual contract with An Post for the supply of welfare payments.

The European Court of Justice (ECJ) yesterday dismissed an action brought against Ireland by the European Commission, which had alleged that the contract should have been put out to public tender. The judgment overturned a preliminary opinion published by the court's legal adviser last year that had sided with the EU executive.

An Post welcomed the judgment describing the lucrative social welfare contract as providing the "backbone of the An Post retail network". Every year An Post provides 900,000 social welfare recipients with payments worth €7 billion, generating valuable revenue for the firm.

In its judgment the ECJ said the commission had failed to prove that the welfare contract was of "interest" to companies residing in different member states. It also dismissed the argument that any interested parties would have been unable to express their interest in the contract because they did not have access to relevant information.

"A mere statement by it [ the commission] that a complaint was made to it in relation to the contract in question is not sufficient to establish that the contract was of certain cross-border interest and that there was therefore a failure to fulfil obligations," the ECJ said in a ruling, which could have major implications for EU procurement policy.

France, the Netherlands, Denmark and Finland intervened in the case in support of the Government's position, fearing a negative decision would force them to change their policies on public service contracts.

A spokesman for the commission said it was studying the implications of the judgment before it commenting further. But EU officials concede the ruling could undermine its drive to open public services to competition.

The Government welcomed the decision. "An Post and the Department of Social and Family Affairs have been partners in the delivery of social welfare payments since the foundation of the State. I am confident that An Post and its network of local post offices will continue to deliver social welfare payments in the future," Minister for Social and Family Affairs Martin Cullen said in a statement. In its submission to the court, the Government argued that the EU treaties allow an exemption from the requirement to publish a prior notice for these types of public service contracts. It said articles 43 and 49 in the treaties provided the legal backing for its arguments.

The commission had argued at a hearing in April 2006 that private companies could have offered the same types of services as An Post or Dublin City Council. The contract should have been put out to tender under the European law, it argued.

The case was taken following a complaint by a private firm against a decision in 1999 by the Government to renew an existing deal with An Post.