The EU's highest court yesterday ruled that Swedish trade unions cannot force a foreign company to observe local pay deals in a landmark ruling set to affect labour rights throughout the European Union.

In a keenly awaited judgment, the court said that a trade union blockade which forced a Latvian company using cheaper Latvian labourers into bankruptcy was illegal.

"Such action in the form of a blockade of sites constitutes a restriction on the freedom to provide services, which, in this case, is not justified with regard to the public interest of protecting workers," said the court.

The ruling is being studied with great interest by the Government, trade unions and employers' representatives in the Republic.

Jack O'Connor, the president of the country's largest union, Siptu, said that if the ruling ultimately meant that companies registered abroad could pay inferior wages here based on local rates in their own country, and that unions could do nothing to encourage them to meet Irish standards and norms, then it could have serious consequences for Siptu's support for the forthcoming EU treaty and its attitude towards the new national pay talks in the spring. Mr O'Connor said that while he had not studied the ruling, it appeared to give on one hand and take on the other.

He said that the judgment appeared to reiterate a previous ruling that the right to strike was fundamental, while also acknowledging the right to take industrial action against social dumping.

The Irish Congress of Trade Unions and employers' group Ibec said it was studying the ruling.

The Swedish case arose in 2004 and was seen as a testing ground for member states with greater workers' rights against those with less rights, such as the central and eastern European states, including Latvia, that joined the bloc in that year.

The dispute centred around wages with the Swedish trade unionists urging Latvia's Laval, building a school in the Swedish city of Vaxholm, to pay higher Swedish construction sector wages to its Latvian workers. The firm refused, leading to union members blocking the site and eventually forcing Laval to leave.

But the court said collective action cannot be used to force a company to enter into negotiations on pay where it is not clear what the outcome will be. It noted that union action forcing foreign companies into wage negotiations of "unspecified duration" is liable to make it "less attractive or more difficult" for a company to carry out construction work and "therefore constitutes a restriction on the freedom to provide services".

The freedom to provide services is a key pillar of the EU's internal market rules.