The man said police gave him a protection order from his ex-partner and then gave him a ride home.
An officer told him he had three months to file an objection to the order, but after he left he read that he actually only had 10 days.
The following Monday, he went to the Whangarei District Court and asked for the protection order to be served on him.
It was not ready and when he told court staff he had been arrested, court staff told him he could not be arrested and police could not act on it until the order had been served.
"The average person, if they were arrested like that they would be happy to be home and wouldn't know they had been arrested unlawfully," he said.
Shannon Parker, of the New Zealand Police Conduct Association, helped the man present his compensation case to police.
"There are more and more protection orders being given out by the court and police need to know how to check and enforce these orders," Ms Parker said.
She said police staff needed more training in relation to protection orders.
Whangarei police area commander Inspector Justin Rogers said an internal inquiry established how the error occurred, which found the arresting officer had incorrect information due to a miscommunication about the status of the order.
"The settlement has now been reached and police consider this matter finalised," Mr Rogers said.