Arbitral Award Against OYO On Dispute With Zostel Flouts Public Policy: Delhi HC

The Delhi High Court has reportedly said that the arbitral award passed in 2021 against hospitality major OYO on its dispute with rival Zostel Hospitality violated public policy as it was based on a term sheet that was not binding.

As per a report by Bar and Bench, the court made the observation while setting aside the arbitral award that had entitled Zostel to up to a 7% stake in OYO’s parent Oravel Stays Private Limited.

The court ruled that the agreement for the acquisition of Zostel’s budget hotel offering, Zo Rooms, signed between both the parties in 2015 was expressly non-binding and could not be enforced.

It added the award failed to adjudicate core issues, including whether any concluded contract existed, and violated the public policy of India under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996.

Justice Sachin Datta passed the order on May 13 in a petition filed by OYO under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the award.

“The findings in the impugned award are virtually to the effect that the respondent/ claimant is ‘entitled to specific performance’ notwithstanding absence of consensus ad idem on vital material terms. The same tantamounts to granting specific performance in the absence of a complete agreement between the parties,” the court observed.

The Decade-Long Tussle Between OYO And Zostel 

The saga started in 2015, when OYO was eyeing acquisition of Zostel’s budget hotel offering, Zo Rooms. 

In November that year, a term sheet was executed among OYO, Zostel and Zostel shareholders Tiger Global and Orios Venture Partners. 

In the term sheet, there was an agreement for OYO’s acquisition of Zostel’s identified assets, technology, intellectual property, employees and hotel supply network in exchange for Zostel shareholders receiving a 7% equity stake in OYO.

However, it is pertinent to note that the document was non-binding and the transaction would be considered completed after executing definitive agreements. 

Two years after that, OYO state that it was no longer involved in talks with Zostel for the potential acquisition after entering into an alleged “non-binding term sheet”.

At the time, the Ritesh Agarwal-led company said that both companies mutually agreed to terminate the non-binding term sheet (NBTS) due to issues including non-completion of the due diligence process and transaction structuring by Zostel.

However, Zostel claimed that the travel tech major put the deal on the backburner after acquiring the data of its employees, assets, and hotel properties under the pretext of accelerating the process of acquisition. 

Subsequently, in February 2018, Zostel filed a petition, before the arbitration tribunal, seeking $1 Mn in relief and 7% shareholding in OYO as promised under the term sheet.

In March 2021, the sole arbitrator found that while the term sheet was labelled non-binding, the conduct of parties made it enforceable. The arbitral tribunal noted that OYO acted in breach of the binding agreement and it allowed Zostel to seek relief in further proceedings.

Following that, Zostel filed a plea before the Delhi HC to restrain OYO from altering its shareholding, including via its proposed IPO, saying that any such process would “frustrate enforcement of the arbitral award”. It also wrote to SEBI about its dispute with OYO, which was then gearing up for its IPO. 

In February 2022, a division bench of the Delhi HC bench dismissed Zostel’s petition and observed that the arbitration award did not crystallise into an enforceable right to shares for Zostel. At the time, the HC said that there were no “fruits” of the award (7% stake) that required protection.

A month later, another bench of the Delhi HC disposed of an appeal by Zostel seeking a stay on OYO’s IPO. 

In the most recent development last week, Delhi High Court set aside the 2021 arbitration tribunal’s ruling.