Cape & Dalgleish v Fitzgerald

The House of Lords held that a settlement agreement between IMP and its former chief executive was not intended to represent full compensation for losses caused by him and therefore did not extinguish IMP's claims against third parties such as its auditors. The court applied principles of construction of settlement agreements and distinguished the decision in Jameson v Central Electricity Generating Board where a claimant had accepted a sum as fully compensating the loss. The court relied upon the terms of the agreement (including warranties and indemnities in clauses 4, 7, 8, 10 and 11), and the factual matrix (rapid negotiated settlement, uncertainty as to the true extent of loss, Mareva injunction and ongoing investigations) to conclude the agreement permitted further claims and remedies against others and did not amount to accord and satisfaction of IMP's claim against the auditors. The auditors therefore were not entitled to treat the settlement as extinguishing IMP's cause of action and the appeal was dismissed.

Background and parties. IMP (IM Properties plc and related IM companies) sued its former chairman and chief executive, Mr Fitzgerald, after his summary dismissal; that action was settled by a compromise agreement on 18 June 1993. IMP later sued its auditors, Cape & Dalgleish, for negligence and breach of duty for failing to detect frauds said to have been committed by Mr Fitzgerald. The auditors were held liable at first instance and ordered to pay damages. The auditors then sought contribution from Mr Fitzgerald under the Civil Liability (Contribution) Act 1978 for sums paid to IMP. Mr Fitzgerald denied liability and counterclaimed.

Procedural history. After trial and assessment of damages against the auditors, preliminary issues were determined by a deputy judge of the Queen's Bench who held, among other things, that (a) the settlement agreement could not as a matter of law extinguish claims against the auditors irrespective of share value and (b) in any event the agreement did not in fact have that effect. The Court of Appeal dismissed Mr Fitzgerald's appeal against those rulings. The matter came to the House of Lords on Mr Fitzgerald's appeal.

Nature of the claim and relief sought. The auditors sought contribution or indemnity from Mr Fitzgerald for the sums they had paid to IMP; Mr Fitzgerald relied on the settlement agreement as constituting accord and satisfaction or a release that precluded IMP's claims against the auditors.

Issues before the House. (i) Whether the principles applied in Jameson v Central Electricity Generating Board (concerning settlements with concurrent tortfeasors) extend to settlements with other wrongdoers and, if so, in what circumstances; and (ii) whether, on proper construction, the 1993 settlement extinguished IMP's claims against the auditors.

Court's reasoning and conclusions. The House held the Jameson principle applies where the claimant has accepted a sum as fully compensatory for the damage claimed, but whether a settlement has that effect is a matter of construction in light of the surrounding facts. On the facts here the settlement was negotiated rapidly at a time when the extent of the loss and the value of Mr Fitzgerald's transferable assets were unknown. The agreement contained warranties about the assets disclosed and an indemnity provision permitting IMP to pursue further recovery if the warranty proved false. The releases in clause 7 were directed to mutual releases between IMP and Mr Fitzgerald and contained no clear intention to release claims against third parties such as auditors. Given the factual matrix (Mareva injunction, ongoing investigations by newly appointed joint auditors, concern about criminal exposure, uncertainty as to valuation) the agreement was not intended to be full compensation for all loss caused by Mr Fitzgerald and did not extinguish IMP's claims against the auditors. The appeal was dismissed.

Appeal dismissed. The House concluded that the settlement agreement was not intended to represent full compensation for the companies' loss and did not extinguish IMP's claims against third parties such as the auditors; Jameson applies where a claimant accepts a sum as fully compensatory, but, on construction and the factual matrix here, that was not the case.