In the fallout from the failed merger of General Electric and Honeywell, Honeywell’s board of directors last month huddled to contemplate whether the company has a legal case against GE for failing to use “reasonable best efforts” to win approval for the proposed deal in Europe.

Honeywell has retained well-known attorney David Boies, who led the federal government’s antitrust case against Microsoft and represented former Vice President Al Gore during last fall’s Florida ballot recounts, and law firm Kirkland & Ellis for guidance.

Under terms of the merger agreement, GE could be forced to pay Honeywell as much as $1.35 billion if Honeywell can prove that GE didn’t do enough to gain approval of the merger in Europe, where antitrust regulators killed the proposed takeover early last month. In the agreement, GE was required to use reasonable “best efforts” to win antitrust approval. Based on GE chairman and CEO Jack Welch’s rejection of a last-minute request by Honeywell that the companies submit a revised proposal to EC regulators, a lawsuit by Honeywell against GE is not outside the realm of possibility, legal experts said.

The wild card in the unfolding drama could be new Honeywell chairman and CEO Lawrence Bossidy, a former GE executive and close friend of Welch, who took the helm at Honeywell on July 3, the same day the European Commission issued its rejection of the planned transaction.

When Bossidy ended his career in April last year after masterminding the $15 billion merger of Honeywell and AlliedSignal, he was looking forward to the leisure pursuits that are the perquisites of retirement, namely improving his golf game on the links near his Connecticut home and spending more time with his wife, Nancy. Fifteen months later, following two failed takeover attempts by competitors and a harrowing ride for investors, not only is Bossidy back at the helm of Honeywell, he is feverishly devising plans to put the beleaguered company back on an even keel. In the last month, Bossidy, who served as chairman and CEO of AlliedSignal from 1991 to 1999, has streamlined internal reporting procedures and begun an assessment of the company’s management team. The job certainly is no sinecure, and Bossidy will face a tough road ahead as he makes difficult decisions about Honeywell’s future direction.

In the last nine months Honeywell has suffered from the distractions of the failed GE merger. The CEO’s job now is to get everybody back to focusing on Honeywell operating as a stand-alone company.

The mood among many of Honeywell’s employees following Bossidy’s return is more upbeat and optimistic than it has been at times in the last year and a half. In that time former Honeywell chairman and CEO Michael Bonsignore struggled to regain the confidence of investors and Honeywell’s board in the wake of unexpected earning shortfalls. Rumors that Bossidy, as early as May of last year, was privately telling board members that Bonsignore didn’t have what it took to run the $25 billion company, contributed to internal chaos as Honeywell entered into merger talks with United Technologies late last spring.

By the time Welch made his now infamous end-around for Honeywell last October, things were briefly starting to look bright for Bonsignore, who would have served no role in a combined GE-Honeywell, but whose golden parachute would set him down gently into a mountain of cash.

As merger negotiations with European regulators dragged on, however, Bonsignore again became the focus of scrutiny; hours after the deal’s collapse, Bossidy was on the telephone with reporters, brightly explaining how he planned to turn the company around. The ousted Bonsignore, meanwhile, was refusing all media requests for interviews. At Honeywell, two days after the EC’s decision, the company’s board issued a brief statement saying Bonsignore had “announced his decision to retire from the company, effective immediately.”

Analysts speculate that Bossidy, 66, will seek to improve Honeywell’s operating margins by shedding under-performing businesses outside aerospace. Still unclear is whether Bossidy, a former top lieutenant under Welch who served at GE for 33 years, would support legal action against GE. The day Bossidy took control of Honeywell he said the company would decide whether to sue, seek a settlement or agree to terminate the GE-Honeywell agreement mutually.

Late last month GE and Honeywell agreed to release each other from many of the constraints of the merger contract, freeing Bossidy to make decisions without GE’s approval. Under the merger agreement Honeywell was prohibited from making major decisions, such as workforce cutbacks or buying and selling businesses, without first consulting GE and getting its permission.

The acquisition of Honeywell would have been Welch’s crowning achievement at GE. Now, the 65-year-old chairman plans to retire after GE’s September 7 board meeting, having failed in the last and biggest deal of his life.

The saga of the last nine months will forever be connected to the executives who were closely involved in the abortive merger, even if it does not overshadow otherwise successful careers. At this point, nobody can guess where Bonsignore, 60, will end up next, or whether Bossidy can successfully right a foundering Honeywell in the face of a sagging economy.

As for Welch, the future is relatively assured–he recently received a $7.1 million advance to write a book about business management, in which he will provide his insight into just what went awry while he was on the goal line, struggling to win approval for the GE-Honeywell deal, with the final seconds of his career ticking down to zero.