UPDATED 4.22PM: Murray McCully has admitted that a potential legal threat by a Saudi Arabian businessman had been withdrawn up to a year before Cabinet approved millions in taxpayer dollars for his private farm.

The businessman was threatening to sue the Government for stopping live sheep exports to Saudi Arabia after he'd invested a lot of money in the trade. The 2003 ban was implemented by Labour and extended by National, and is believed to be a reason for a stalled regional free trade agreement.

New Zealand spent more than $11.5 million to help establish a demonstration farm in Saudi Arabia, but does not have any contractual rights to access it.

Claims as of corruption and bribes flew in parliament yesterday when Foreign Minister McCully used the threat of legal action by the businessman, through prominent lawyer Mai Chen, to justify setting up the farm in Saudi Arabia.

McCully said today that when the deal went to Cabinet, the threat was no longer there.

"It certainly would have been by the time the Cabinet paper was filed but at the time we were dealing with the issue it was something that was very much part of the background," he said.

Prime Minister John Key is standing by his Cabinet colleague, saying there was nothing suspicious about the transaction. Key said it's standard for legal action to be dropped during negotiations. 

"He certainly argued very vigorously that the actions of the previous government misled him. Whether that legally would've succeeded in court is not for me to determine because I'm not a lawyer," he said. 

"Look, it's a complex and difficult situation and people can always sit back and say 'well, do nothing' but I don't think 'do nothing' was really an option on so many different fronts."

Contender for the Green Party co-leadership James Shaw quipped in parliament that "He's got your money for nothing and your sheep for free."

Shaw wants the office of the Auditor General to look into the procurement process. 

"It does seem pretty strange that we were sending money in to his businesses given that there wasn't really a case, or didn't seem to be a strong business case."

"It seemed to be compensation for a grievance he had."