Cape & Dalgleish v. Fitzgerald and Others

Where proof of damage is essential to a claim, a settlement with one wrongdoer defeats a claim against another only if the claimant agreed to accept the settlement as full compensation for that damage. Whether the settlement had that effect is a question of construction in light of the agreement and all relevant surrounding circumstances.

A comprehensive release of the settling wrongdoer does not by itself establish full compensation. An unquantified loss, uncertain consideration and contractual rights to recover further assets may demonstrate that the settlement represented only the contribution then obtainable from that wrongdoer.

Companies in the IM group settled claims against their former chairman, Mr Fitzgerald, following allegations of fraud and breaches of fiduciary duty. The settlement transferred his shareholdings and released him from claims connected with his employment and office. The companies later recovered damages from their auditors for failing to detect and report his wrongdoing.

The auditors sought recovery or contribution from Mr Fitzgerald under the Civil Liability (Contribution) Act 1978. He contended that the earlier settlement had extinguished the companies’ loss and therefore their claim against the auditors. A deputy High Court judge rejected that contention, and the Court of Appeal unanimously dismissed Mr Fitzgerald’s appeal.

The central question before the House was whether the settlement constituted full compensation which defeated the companies’ claims against other wrongdoers.

1. Appeal unanimously dismissed. Lord Mackay of Clashfern delivered the leading speech. Lord Bingham of Cornhill agreed completely with it, and Lord Steyn, Lord Hope of Craighead and Lord Rodger of Earlsferry also agreed that the appeal should be dismissed.

2. Per Lord Mackay, the decision in Jameson v Central Electricity Generating Board [2000] 1 AC 455 establishes that, where proof of damage is essential to an action, the action cannot proceed if the claimant has agreed to accept a sum as full compensation for that damage. Whether a settlement has that effect is a matter of construction, assessed against all the relevant surrounding facts.

3. Per Lord Mackay, the settlement could not be construed as an agreement to accept Mr Fitzgerald’s consideration as full compensation for the damage caused by his activities. The agreement was made very shortly after discovery of the wrongdoing. Neither the extent of the loss nor the value of the transferred shares was known or reasonably estimable. Further investigations were expected, and both parties knew that other persons, including the auditors, might face claims.

4. Per Lord Mackay, the extensive release of Mr Fitzgerald did not show that the companies had renounced claims against anyone else. Nothing in the agreement released the auditors. The warranty concerning the completeness of Mr Fitzgerald’s disclosed assets, together with his indemnity for breach, showed that the settlement concerned what could then reasonably be obtained from him. It also preserved the possibility of seeking a further contribution if undisclosed assets emerged.

5. Lord Bingham added that the compromise was plainly neither intended nor understood to represent full compensation for the still-unquantified loss or to exhaust claims against other parties. The reasoning in Heaton v AXA Equity & Law Life Assurance Society plc [2002] UKHL 15 applied equally. The Jameson principle therefore afforded Mr Fitzgerald no defence, and the auditors were entitled to their costs.

1. House of Lords: Unanimously dismissed Mr Fitzgerald’s appeal and upheld the conclusion that the settlement did not extinguish the companies’ claims against the auditors.

2. Court of Appeal: Unanimously dismissed Mr Fitzgerald’s appeal from the determination of the preliminary issues.

3. High Court, Queen’s Bench Division: A deputy judge held, among other matters, that the settlement was not capable of extinguishing the companies’ claims against the auditors and, on its proper construction, did not have that effect.