I obviously haven't been in the game the whole time to know all the details, and maybe I'm misreading the situation, but it sounds to me like at least this half of the party is operating under a well-earned assumption that Ignus won't attack them until they draw first blood.
Absolutely correct. He asked them if Fireheart had sent them and they assured him that he hadn't.
First, Fireheart has sent them on the quest. By promising a reward, he's entered into a contract with the party. So clearly, they are under the directive of protection until they break it.
Except that he made it abundantly clear that he
wasn't offering them any reward or repayment. A few favors are owed to him, and he went out of his way to state that he couldn't pay anyone, offer favors nor forgive favors owed. Further, the party's current leader is a Paladin of Freedom who
can't work for him, and has to fight with himself not to just kill the Efreet where he stands.
Second, the reason the number of enemies has escalated so much is that they were simply allowed to walk past the guards. If I were in that half of the party, I would assume that if I wasn't supposed to be allowed inside, the guards would at least try and stop me. By letting the party inside and parlaying with Ignus, the assumption is that they won't be attacked if they don't start a fight.
So, the easy solution for that half group is to simply end negotiations and leave, and plan another scheme from outside. You've given them penty of reason to expect they will be allowed to walk free. If you stop them from doing so, the TPK is on you. If they make the unfortunate decision to attack head on against those odds, then the TPK is on them.
The Paladin told Ignus that he wanted to discuss the freeing of slaves (a real sore point for the Paladin of Freedom.) When asked what he offered in return the Paladin responded, "Your life". It just got worse from there.
One of the mercenaries knew the Paladin from their younger days, and though they never liked each other, he asked the Paladin if he preferred tournament rules or battlefield. The Paladin replied "battlefield". So the two are facing off for a lance-charge on horseback. The other knight may be an evil son of a birch tree, but he still has a knightly code of honor, and offered to meet the Paladin under those terms.
We stopped the game for lack of time just before rolling Initiative.
The Paladin discovered, too late, that his Paladin's mount, being Celestial, doesn't have any fire resistance, while the other man's mount does. His will be taking a D10 of damage per round, which may put the Paladin at a disadvantage. He said he was going to dismiss the mount, which places him as an armored knight, afoot in a "rough terrain" landscape (1/2 speed) against a mounted knight with a lance, and a mount that isn't hindered by the terrain.
You see why I say he's going to get creamed. His honor won't let him retreat, and it wouldn't do him any good even if he did.
BTW: I effectively neutralized the party Rogue by having the bad guys' Bard (Rogue in disguise) call her aside and ask if she has any good stories. Their "Bard", like the party Rogue, is female. She's "sparkley" as a Bard should be, and is so bouncy and happy it's hard not to like her. (She works at that.) "Oooh, this is going to make such a great story!"
So the party's Rogue present, but too far away to help and far too far away to escape with them if the Cleric (only other PC present) decides to Plane Shift away with the Paladin. And with a bit of role playing I've managed to split the already split party even further.
Rules note: In 3.5 a Rogue of a certain level keeps her Dex even when flat footed, and can't be flanked. Only a Rogue of at least four levels higher can get a Sneak against her from a flank.
improved Feint, on the other hand, is none of those things, and denies the target their Dex. The player may believe that she's immune to Sneak attacks. She isn't, and could fall in one or two such strikes.
It's gonna be ugly.