"It would be artificial and inimical [tending to obstruct or harm] to good public administration for the public submissions and the decision on revocation to be prevented by law from taking into account the proposed land exchange," the judgment reads.
"On the evidence before me, although the focus of the decision paper on the exchange came perilously close to risking the wrong legal test being applied to the revocation decision, I consider the director-general [Lou Swanson] did satisfy himself of what was required."
The judge agreed with Forest & Bird that "two distinct decisions" are needed to exchange conservation land for other land, but disagreed with the lobby's argument that a land-swap was irrelevant to the decision to revoke conservation status.
"Enhancing the conservation values of land managed by Department of Conservation is not the test for the revocation decision, which involves a broader conception of conservation purposes than only reference to what happens on land managed by Doc [sic]," the judge ruled.
"In making the revocation decision, the decision-maker must satisfy himself or herself that there is a good and proper basis, founded in conservation purposes."
Justice Palmer found Mr Swanson satisfied himself that there was a good and proper basis, founded on conservation purposes, to revoke the land's status and allow the swap, while acknowledging "the basis on which the decision was made is harder to establish".
Forest & Bird lawyer Sally Gepp said the ramifications of this decision and any future legal decisions arising from it need to be carefully considered.
"The judge's very first point is that this case goes to the heart of the purpose of the Conservation Act 1987," she said.
"That is why it is such a significant case for F&B.
"Given the significant implications of this decision for specially protected land throughout New Zealand, F&B is considering how it will respond, which may include appealing the decision to the Court of Appeal."
HBRIC said it was pleased with the judgment, the company's chief executive Andrew Newman saying the decision was very balanced.
"Ultimately Justice Palmer confirmed the director-general correctly focused on the conservation purposes underlying the Conservation Act as being the key criterion for his decision," he said.
Mr Newman said the decision was another step in the process and brought everyone closer to a final decision on the scheme.
"This decision gives everyone further certainty, especially farmers who are considering signing up to take water from the scheme, and potential investors," he said.
The High Court agreed with a separate argument made by Forest & Bird that the land exchange triggers the need for the department to look at reserving 20m marginal strips of conservation land along any waterways within the land being disposed of.
Both the Department and the dam company had argued that when the Department gives land away as part of an exchange, this is not a disposal and the marginal strips issue does not arise.
The court said that argument was "simply not tenable" and that whether marginal strips need to be reserved depends on facts as yet unknown, including a survey of the boundaries of rivers.
Ms Gepp said the dam company might yet need to seek a concession to flood marginal strips or try to get the Department to grant an exemption.
Justice Palmer didn't award costs "because F&B has competently and responsibly advanced legitimate arguments in the public interest".
— Additional reporting
Paul McBeth
