A start-up title insurance agency (funded by a prominent private equity firm), and a leading insurance company had entered into negotiations to launch a joint venture that was to last a minimum of five years. Each side, represented by preeminent legal counsel, conducted due diligence, negotiated, and drafted documents. Everything was all set to go, and they scheduled a closing. The morning of the closing, however, the insurer refused to close (its change of heart was connected to its pending IPO).
Years of litigation ensued, with millions spent on attorneys’ fees and no end in sight. The central $20 million legal issue before the supreme court at the time of the mediation was whether to recognize a promissory estoppel exception to the Statute of Frauds. That is, since the joint venture was to last five years, but no written joint venture agreement had ever been signed, did the insurance company’s purported promise to execute a joint venture agreement obviate the need to comply with the Statute of Frauds? Notably, numerous other jurisdictions had already held that, under various circumstances, promissory estoppel may be used to remove an agreement from the Statute of Frauds.
The insurer was 90% confident that the supreme court would reverse the appellate court and hold that the absence of a writing rendered any agreement unenforceable (and so would settle for $2 million), and the start-up was 60% confident that the supreme court would affirm the appellate court and recognize a promissory estoppel exception to the Statute of Frauds (and so demanded $12 million). Obviously, they both could not be right, but counsel for each side genuinely believed their finely crafted legal arguments would prevail in court. Such strongly held opinions and a $10 million delta create a huge roadblock—under the traditional adversarial model, there was no bargaining zone.
I determined, however, that notwithstanding the confidence each side’s counsel expressed in their legal positions, the clients themselves were still interested in limiting their financial exposure if they turned out to be wrong. I therefore structured a settlement that permitted the central $20 million issue to be litigated, but also provided that the outcome of the litigation would determine the settlement amount within a specific range and resolve all lesser issues included in the litigation. Both parties agreed; they got their day in court but with much lower financial risk in the event of a loss.