Foreign Minister Murray McCully is being accused of lying and bribery after admitting a threat of legal action by a Saudi businessman was withdrawn a year before he was delivered a multi-million dollar payout.

Hmood Al Khalaf, a prominent Saudi Arabian businessman, received $11.5m in taxpayer dollars for his demonstration farm in the Saudi desert. The opposition claim he got the cash in compensation for New Zealand banning live sheep exports in 2003 and not dropping the ban when National returned to power.

It's also alleged that Al Khalaf ensured a free trade deal between the two countries failed.

A legal threat was made by the businessman, with the help of lawyer Mai Chen, rumoured to be worth $30m. Yesterday, McCully admitted that the threat had been dropped by the time the payment was made.

McCully had previously used the potential legal threat to justify the payout.

Labour Party trade spokesperson David Parker claims the Foreign Minister has mishandled the whole incident.

"He's misleading, he's misleading his cabinet, he's wasted millions of dollars of government money and he has paid a facilitation payment in order to advance the Saudi free trade agreement which in other countries is called a bribe," he said.

Parker believes the government being sued was never a real possibility, as it was outside the time limits on when legal action could be taken.

"This deal was done in 2013 therefore any course of action had to arise from 2007 and later. I've gone back to 2005, these excuses from mister McCully are utterly baseless."

McCully told parliament yesterday that officials had confirmed the payments were legal and within the scope of his ministry's appropriation - but he declined to make public any legal advice that backs this position.

"Governments never release legal advice on these matters for the same reason I was careful to redact from the paper some of the matters that were prejudicial to New Zealand legal interests," he said.

Green MP James Shaw wants the office of the Auditor General to look into the procurement process, and McCully claims he's completely happy for that to happen.

"All the steps that government departments take are open to scrutiny but the Audit Office every day of the week, every step that's been taken in relation to the transaction that we've been talking about in the house has been taken knowing that everything is open to scrutiny," he said.