The law in the EU is governed by "Council Regulation (EEC) No 295/91 of 4 February 1991 establishing common rules for a denied-boarding compensation system in scheduled air transport ". See:
http://europa.eu.int/eur-lex/en/lif/..._391R0295.html

A fairly 'plain English' summary of the regulation can be found at:
http://www.ecic.ie/tips/tip_06.html