The High Court has ruled that Corrections banning the release to work scheme and temporary releases for inmates following the escape of murderer Philip John Smith in 2014 was unlawful.
And an inmate involved in the court case says prisoners affected by the temporary bans are now eligible for compensation - which could set the department back a significant sum of money.
The legal challenge was brought by Smith last year.
Smith - a convicted murderer and child sex offender - was on a 74-hour temporary
release from Spring Hill prison when he managed to board a flight to South America in November, 2014, sparking an international manhunt, before being arrested and sent back to New Zealand.
He was jailed in 1996 for at least 13 years for murdering the father of a 12-year-old Wellington boy he had been molesting, while on bail on the child molestation charges.
Temporary release and the release to work scheme are available for some low-risk prisoners to reintegrate them into the community.
Both were temporarily revoked on November 11, 2014, after Smith's escape, as a precaution.
The interim system remained in force until October 19, 2015.
Smith - helped by recently released high profile inmate and "jailhouse lawyer" Arthur
Taylor - later mounted a legal case against Corrections, arguing the ban was illegal.
Last year Crown lawyers tried to get Smith's complaint thrown out of court saying it was an abuse of process, there was no reasonable case to argue and that Smith lacked the status required to actually bring the case.
But the High Court at Auckland rejected an application from Corrections, saying Smith was "sufficiently affected by, and connected to, the decision at issue".
Justice Matthew Palmer said Smith had "personal standing to bring his claim".
"Even if he did not, there is sufficient public interest in whether the temporary release scheme was lawful that there would be public interest in standing too."
The decision on Smith's challenge was released today from the High Court at Auckland.
In it Justice Sally Fitzgerald said the ban on temporary releases was "unlawful, in that they
directed an impermissible exercise of discretion as to the classes of prisoners eligible
for temporary release, inconsistent with the relevant statutory regime."
"In the context of Mr Smith's escape, updated guidelines which tightened up the regime and directed particular emphasis on public safety would have been quite appropriate," she said.
"But the circulars crossed the line, in my view, into impermissible dictation.
"It was not open to the chief executive to issue guidelines in quite concrete terms which
directed delegated decision-makers that, in effect, their discretion could not be
exercised at all in relation to those prisoners.
"The temporary release circulars were accordingly unlawful, in that they directed an impermissible exercise of discretion as to the classes of prisoners eligible for temporary release, inconsistent with the relevant statutory regime."
Justice Fitzgerald said the banning of release to work was also "unlawful".
Taylor, who spent more than 40 years behind bars and was release on parole earlier this year, spoke about the case after seeing the decision.
He said it was "bloody great".
"Another serious blow to Corrections' lawlessness," he said.
"And vindication for all those who were unceremoniously dragged off work parole through no fault of their own - and their employers who lost some of their best workers."
"All those affected are now eligible for compensation."
Taylor believed every inmate denied access to the release to work scheme could apply for compensation for lost wages, and emotional distress.
"And their employer will be able to claim all losses he suffered or incurred due to losing (the inmate) suddenly.
"Furthermore, many prisoners chances of being granted parole were substantially lessened - so a claim can probably be made for the loss of opportunity to obtain freedom, as those with a job obviously and a greater chance of being granted parole."
Taylor spoke to Smith at Rimutaka Prison near Wellington soon after hearing the case outcome.
"He was elated with the judgment," he said.
"He said that in finding Corrections acted unlawfully the court has squarely laid the blame on them for what happened to the many prisoners who were suddenly yanked back inside the wire and lost their work parole.
"They blamed him and he had to go into protective segregation as a result of numerous threats to his safety."
Taylor told the Herald he would continue to work with Smith and any other inmates on compensation bids.
Taylor said on Facebook that he appreciated some people would not care for the case based on the fact Smith was the front person.
He explained he could not file the proceedings in his own name as he "lacked standing".
"I wasn't directly affected," he said.
"Whereas he did (have standing) as Corrections blamed him for it all.
"Thems the breaks - sometimes you have to sup with the devil for the greater good. And he 100 per cent satisfied me his sexual offending days are over."
Taylor and Smith also banded together to take Corrections to task over a mass strip search at Auckland Prison in 2016.
About 200 prisoners, including Arthur Taylor and Phillip John Smith were strip searched in
Auckland prison in October 2016 after a group of inmates attacked staff.
Four prisoners in C block of the division attacked prison officers - two of four prisoners were armed with shanks - leaving one officer requiring hospital care.
Taylor and Smith did not take part in the assault - both were situated in A block - but were among the number searched in the bid to find weapons and homebrew.
Justice Mary Peters ruled the strip searches of Taylor and Smith were "unlawful and unreasonable", in breach of the New Zealand Bill of Rights Act 1990.
Justice Peters said ordered the Attorney-General to pay to Taylor and Smith compensation of $1000 each.
In a statement, a Corrections spokesperson said the agency was carefully considering the judgement.
"Following prisoner Phillip Smith's escape to Brazil in November 2014 we took immediate steps to ensure public safety. One of these steps was to provisionally suspend the temporary release of prisoners, with some specific exemptions for those taking part in release to work, supervised programmes or with exceptional circumstances.
"This was a temporary measure to ensure public safety while a comprehensive review into our procedures surrounding prisoner activities outside the prison perimeter was completed.
"Mr Smith's escape to Brazil was unprecedented. He was serving a life sentence for the murder of a man whose child he had been sexually abusing. In November 2014, he had been granted a 72-hour temporary release from prison for reintegrative purposes when he escaped. Following these events it was critical to take immediate action to ensure that the safety and security of New Zealanders was not further compromised."
The spokesperson said Correction introduced a new, strengthened process in October 2015 to ensure the robust assessment of prisoners due to be temporarily released to undertake reintegrative activities outside of prison.
"Since 2015 applications for temporary release have been considered by a multi-disciplinary advisory panel... The panel approach ensures that a range of views and evidence is presented about the suitability of a prisoner to be temporarily released for a short period of time, and how the activities could be facilitated and managed.
The panel considers the risk to the public and the benefit to the prisoner. A recommendation is then provided to the decision maker to allow them to make an informed decision about approving the prisoner's participation, and any conditions the prisoner should be subject to, including GPS monitoring."