The High Court in Auckland has ruled that excessive defamation damages against Colin Craig constitute a miscarriage of justice.
Taxpayers' Union founder Jordan Williams won his case against the former Conservative Party leader last September.
The jury awarded $1.27 million in damages - the highest ever amount in a New Zealand defamation case.
In reviewing the case, Justice Katz said the damages were well outside any reasonable range, by a significant margin.
"Viewed objectively, Mr Craig's statements cannot be said to have been markedly worse than the statements made in all of the previous defamation cases that have come before the court.
"The damages award is well outside of the range that could reasonably have been justified in all the circumstances of the case. The consequence is that a miscarriage of justice has occurred."
The highest previous amount was the $825,000 awarded to Auckland accountant Michael Stiassny in 2008.
"The Court of Appeal described the case as the worst case of defamation it could find in the British Commonwealth. Mr Craig's conduct falls far short of that... yet the jury's total damages award is almost 50 percent greater."
Justice Katz said there would either have to be a retrial or the two parties could agree to accept a new damages award.
The parties have until 26 April to advise the court whether they consent to the court substituting its own award, otherwise the jury's verdict will be set aside and a retrial set.
Mr Craig said he was relieved at the miscarriage of justice finding and the judge's ruling was "bang on".
"The only correct course coming out of that trial last year was to in fact rule it as a mistrial.
"The law has been properly exercised in this particular case."
Mr Craig said what happened now was up to Mr Williams, as he would not be agreeing to any new damages.
"The fact of that matter is Mr Williams simply hasn't made his case against me yet. He is entitled to take this matter back to court. If he does I will defend myself."
"This is really his decision to make. For me, I'm happy where things are right now."
Mr Williams said he would not be commenting on the ruling.