A "respectful" meeting yesterday between the Prime Minister and a cameraman he had long maintained deliberately recorded the tape led to defamation action being dropped.
Mr Key's office today released an agreed statement with freelance cameraman Bradley Ambrose, which said Mr Key now accepts the cafe recording was not deliberate, and acknowledged his previous comments on the matter as harmful.
The Prime Minister will also make a "small payment" towards Mr Ambrose's costs, which will be met from the Parliamentary leaders' budget -- something Labour leader Andrew Little has criticised.
Some previous legal costs relating to the case had already been met by taxpayers.
Today, at his regular post-Cabinet press conference, Mr Key was repeatedly asked whether it was correct to use taxpayer money to settle the defamation action.
"The money will be either paid for by the Parliamentary leaders' office, where that fits within the rules, and if payments don't fit within the rules, then it will be met by funds raised by the National Party.
"Costs, if we were going to court, would be considerably more so it is a pragmatic settlement in terms of reducing costs ... the important point here is I am acting in my capacity as leader of the National Party."
Mr Key said he considered the settlement the end of the matter. He did not think the possibility that the settlement would be met by taxpayers would create any problems with future defamation action against politicians.
"The rules have been pretty clear for a long period of time, and plenty of politicians have used the leaders' fund, or if it as a minister or Prime Minister, Crown Law. So there is nothing new here. And, yep, that occurs because of the nature of the work we do."
The settlement with Mr Ambrose came after Mr Key earlier referred the matter to police, leading to searches of the offices of the Herald and other media organisations.
Mr Key previously told his biographer John Roughan that the teapot saga was one of the few times that something had truly "wound me up", that it had "hit me ... deeply" and was a "violation of trust".
Today, he said the settlement was a pragmatic solution that came after a settlement conference with Mr Ambrose in Auckland yesterday. Asked if it was an admission he was wrong, Mr Key said: "I would just encourage you to read the statement".
Mr Ambrose claimed the Prime Minister made defamatory comments about him after he recorded a private conversation between Mr Key and former Act Party leader John Banks at an Auckland cafe in the lead-up to the 2011 general election.
The recording and fallout became known as the "teapot tapes" saga.
Mr Ambrose maintained the microphone was left by mistake, and objected to Mr Key's public statements asserting that was not the case, and likening the conduct to that of the British tabloid News of the World.
A defamation trial had been set down for a two-week hearing next month, and a Givealittle fundraising campaign launched to help Mr Ambrose meet his legal costs.
In the statement, released today, it was agreed that Mr Key's comments -- which the statement said reflected his honestly held views at that time -- had caused harm to Mr Ambrose personally and professionally.
Mr Key now accepts that the conversation was not deliberately recorded, and Mr Ambrose did not otherwise behave improperly, the statement continued.
"Mr Ambrose now accepts that Mr Key believed that the conversation had been deliberately recorded at the time Mr Key made his statements. The proceeding relating to these statements has been settled."
Mr Ambrose told the Herald he could not comment on the settlement. On Instagram, he posted a picture of a cup of tea, with the caption: "I haven't enjoyed tea for breakfast for a long time. Tastes better today."
Labour leader Andrew Little said Mr Key's settlement was a "costly embarrassment", and he should apologise to both Mr Ambrose and the taxpayer.
"Night after night John Key smeared Bradley Ambrose's name on television in the middle of a high-profile political campaign. By attacking an innocent New Zealander for political gain he made it difficult for Mr Ambrose to get work and undermined his character. He has yet again demeaned the office of Prime Minister," Mr Little said.
"This incident did not happen while he was undertaking his Prime Ministerial role. He was a party leader having cups of tea with a coalition partner and for some time afterwards he continued the slur on Mr Ambrose.
"John Key should do the decent thing and apologise to both Bradley Ambrose and the New Zealand taxpayers who have been left having to foot the bill. If anyone can afford to pay for a 'small cash settlement' it's John Key."
A freelancer, Mr Ambrose had said he lost tens of thousands of dollars as work dried up during the scandal.
The teapot recording was given to the Herald on Sunday, and it sought Mr Key's permission to publish a transcript. He called in the police, who investigated and issued a warning to Mr Ambrose over the recording.
The recording was later anonymously published online.
The tale of the teapot
November 11, 2011: Prime Minister John Key meets Act's John Banks at a Newmarket cafe for a symbolic cup of tea to induce National supporters to vote for the Act candidate. Their conversation is captured after freelance cameraman Bradley Ambrose leaves a recording device in a black bag on their table.
November 14: Mr Key lays a complaint with police after details of his conversation with Mr Banks are published in the Herald on Sunday.
November 23: Police search the offices of the Herald on Sunday and TVNZ as part of their investigation.
January 26, 2012: The recording is anonymously published online.
March 26: Police say that after a four-month investigation they chose not to press charges against Mr Ambrose.
May 5: Mr Ambrose reveals he and his lawyers are considering suing Mr Key for his comments about him.
December 9, 2014: Court documents reveal Mr Ambrose is suing Mr Key for $1.25 million.
Today: Mr Key and Mr Ambrose issue an agreed statement, which states Mr Key now accepts the recording was not deliberately made. The defamation proceeding has been settled.
