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The former Picton boat-builder is serving a life sentence, which came with a minimum non-parole period of 17 years, for the 1998 murders of Smart, 21, and 17-year-old Hope.
Watson has always denied killing, or even ever meeting, Hope and Smart after New Year's celebrations in a Marlborough Sounds holiday hideaway.
Now aged 50, he has spent 24 years behind bars, having been denied parole four times, and is currently preparing his last chance to overturn convictions.
Today, the Court of Appeal has released a judgment which allows a photo montage to be included for the first time in the appeal grounds.
A crucial part of the Crown case against Watson was his identification by the late Guy Wallace, the water-taxi driver who transported Smart, Hope, and another man that night to a mystery yacht.
Wallace had identified Watson via a photographic montage during the police investigation.
Although he rejected the proposition that Watson was the "third man" in evidence, he maintained that the person shown in photograph 3 of the montage – which was a photo of Watson - was the man he had transported.
Watson's lawyers have sought to have the photo montage identification evidence also included in his last-ditch appeal and this morning the Court of Appeal ruled that it can in the "interests of justice".
"If there is one lesson from the history of miscarriage of justice in the context of criminal appeals, it is that no good is done by the procedural suppression of a tenable ground of appeal which has not yet seen the light of day in an appellate court, while other grounds of appeal are nonetheless allowed to proceed," said former Court of Appeal president, Stephen Kos.
"As Lord Atkin once wisely observed, 'finality is a good thing, but justice is a better'."
The evidence of two hairs found on a blanket in Watson's boat, and said to match that of Hope, was one of two central planks in the Crown case at trial.
Chisnall said the Court of Appeal now has two scientific reports completed by a forensic scientist, which have been peer-reviewed, and point to a lack of due procedures to prevent sample contamination, and that the evidence overstated the strength of the match.
The lawyer says that if that evidence was inadmissible, and should have been excluded, it is likely a miscarriage of justice occurred "inasmuch as the jury would have been substantially influenced by it", says the Court of Appeal decision rejecting Watson's bail.
Chisnall also raised the photo montage issues at the bail hearing.
The police investigation that led to Watson's arrest has been criticised in numerous newspaper articles, documentaries and books, particularly Trial by Trickery by Auckland journalist Keith Hunter, a stinging attack on those who put Watson away.
Watson and his supporters - the case has long divided public opinion – were given fresh hope in June last year after Justice Minister Andrew Little announced that Governor-General Dame Patsy Reddy had referred his case back to the Court of Appeal for a new hearing.
It came after an investigation by former High Court judge Sir Graham Panckhurst QC raised concerns about forensic evidence used to convict Watson.
"The primary basis of his application was that the DNA evidence linking two hairs removed from a blanket seized from Mr Watson's boat with Ms Hope was unreliable," the Ministry of Justice said.
-By Kurt Bayer