Teina Pora has won his legal challenge to the Government's decision not to add an adjustment for inflation to his compensation payout.
The courts suggested the Government reconsider how it interprets guidelines around its calculation of payments.
Mr Pora was wrongfully convicted of the 1992 rape and murder of Susan Burdett. He spent 20 years in jail before being released on parole in 2014.
His convictions were quashed by the Privy Council in 2015, and in 2016 he received $2.52 million and a government apology.
But that payout - based on a $100,000 figure for each year of incarceration - was never adjusted for inflation. Mr Pora's lawyers argued the sum should have been considerably higher.
He then sought a judicial review against the Government's decision not to add inflation to compensation paid to him.
New Zealand's High Court has now decided that justice minister Amy Adams was in error over the amount of compensation due to Mr Pora.
Mr Pora's lawyer Jonathan Krebs said in a press conference on Tuesday afternoon that the Cabinet got it wrong when it did not consider the issue of interest.
Mr Krebs said an actuary had estimated the interest would add an additional $500,00 to $600,000 to the compensation payment.
Investigator Tim McKinnel implored the Minister to do the right thing and do it very quickly.
In the High Court decision the judge said the Minister had made an error in interpreting the guidelines around compensation.
"That error caused, or was compounded by, further errors in the Minister's advice to Cabinet and in the reasons for the Cabinet decision itself."
However the judge had "considerable reservations" about granting the relief sought by Pora's lawyer, Gerard McCoy,QC, which would include quashing the Cabinet decision.
While the judgement stops short of ordering more compensation be granted, it does say there is nothing stopping the Minister from taking the case back to Cabinet.
The judge suggested that "the real error here lay not in the Cabinet decision itself but in the advice that preceded it", and that Cabinet had not had a chance to properly consider Pora's case.
The judge said the guidelines allow for compensation payouts to be adjusted for inflation "where it is in the interests of justice to do so."
"I also invite the Minister to consider whether, in the circumstances of Mr Pora's case, the interests of justice require the benchmarks in the Guidelines to be inflation adjusted. I am unable to see any impediment to her taking the matter back to Cabinet should that be seen as the proper outcome."
"The application for judicial review succeeds accordingly. I can see no reasons why costs should not follow the event."
Justice Minister Amy Adams said she had only just received the decision.
"The judge has declared that the guidelines do not prevent inflation adjustment, which is consistent with my understanding of the guidelines, and has invited Cabinet to consider whether the interests of justice require such an adjustment in Mr Pora's case," she said.
"I will be taking time to consider the detailed judgment, and further public comment on the case would be inappropriate at this stage."
Serial rapist Malcolm Rewa was convicted in 1998 of sex attacks on 25 women including Burdett. But two juries couldn't agree whether he murdered her.
After the second hung jury, the Solicitor-General stayed a third prosecution. Rewa will be eligible for parole in 2018.
In May this year police announced plans to prosecute Rewa for Burdett's 1992 murder.
Key dates
March 23, 1992: Susan Burdett - an avid ten-pin bowler - returned late from club night at the Manukau Superstrike. After showering, she was raped and battered to death.
1994: Pora convicted of the rape and murder of Susan Burdett.
2000: Convicted again, after earlier conviction quashed.
2014: Pora was released from prison at his 13th appearance before the Parole Board.
2015: The Privy Council quashed Pora's convictions.
March 2016: A retired High Court judge, hired by the Government to review the case, finds Pora innocent on the balance of probabilities.
June 2017: Government awards $2.5 million compensation.
August 2017: Pora challenges decision not to adjust his compensation for inflation.
