Despite Zostel’s Claims Of Victory, Stalemate Continues In Tribunal Case Against OYO

The three-year-long OYO vs Zostel (ZO Rooms) battle over execution of term sheet agreements after failed merger talks in 2015 took a fresh turn on March 06, 2021, but both sides continue to be at loggerheads at the arbitration tribunal hearings in front of Justice A M Ahmadi.

While Zostel has sent press releases claiming that the arbitral tribunal had directed OYO to issue 7% shareholding to Zostel (ZO Rooms) founders and execute the term sheet agreements, the hospitality giant has stated that the tribunal has not awarded any such claim to Zostel.

In a press statement issued on March 07, 2021, Zostel claimed: “The tribunal held that the term sheet between Zostel and OYO was a binding agreement. The order stated that OYO breached the term sheet by not executing definitive documents due to OYO’s internal issue. The tribunal recognised that the transaction was consummated as ZO Rooms transferred the entire business in 2016. As a result of the breach, which was not caused by any default on part of the ZO and its shareholders, ZO Rooms’ shareholders are entitled to issuance of decree of specific performance directing the parties to execute definitive agreement.”

Following this statement, OYO fired shots back, claiming that Zostel is misleading the public with its interpretation of the award. The Gurugram-based hospitality giant stated, “In the interest of setting the record straight, we are stating that the arbitration tribunal has granted no specific relief to Zostel in terms of receiving ownership in OYO.”

“The arbitration hasn’t given any direction for issuance of shares as the definitive agreement was neither agreed nor consummated and therefore, closing conditions were far from being achieved and the same has been acknowledged by the arbitrator. The tribunal has ruled and categorically acknowledged that the definitive agreements, which are extremely important documents for any M&A transaction, were neither finalised nor agreed upon.” – OYO’s statement on the tribunal award to Zostel

OYO also claimed that contrary to Zostel’s statements on being awarded the stake in OYO, the tribunal has given direction for seeking specific performance of the non-binding term sheet and did not accede to the request of Zostel and its shareholders demanding monetary damage from OYO.

About Zostel seeking $ 1 Mn as relief, OYO stated the tribunal said it couldn’t be granted as the same is dependent on the fulfillment of post-closing obligations, which was not finalised, agreed mutually or executed.

“OYO is presently evaluating legal remedies for challenging the Award in as much as it appears to treat a clearly non-binding term sheet as a binding document giving rights or remedies to Zostel or its shareholders for the execution of the definitive agreement. OYO continues to strongly hold its position that the parties were merely at the stage of discussions and no definitive agreements were finalised between the parties, as has also been confirmed by the tribunal.”

What The Tribunal Award States

Inc42 has reviewed the award by the tribunal headed by Justice Ahmadi, former Chief Justice of India. It stated that Zostel cannot claim the compensation of $1 Mn as relief at this time. It also denied relief for Zostel’s claims about the loss of goodwill because of the fallout of talks with OYO, which recently raised money at a $9 Bn valuation.

In the final section on the reliefs that each party is entitled to, Justice Ahmadi stated, “This Tribunal holds that Claimant [Zostel] is entitled to Specific Performance of the Respondent’s [OYO] obligations under Term Sheet dated 26.11.2015. However, as Definitive Agreements have yet to be executed, the Tribunal holds that the Claimant is entitled to take appropriate proceedings for Specific Performance and execution of the Definitive Agreements as envisaged, for itself and its shareholders under the Term Sheet.”

In legal terms, specific performance is a legal remedy used by the courts to direct parties to execute the contract as per the terms agreed. This means Zostel can take steps to prove its case and get the specific performance award.

How The OYO vs Zostel Battle Began

In 2015, SoftBank-backed OYO had taken Tiger Global-backed ZO Rooms to court over alleged theft of its copyright material. However, the Delhi High Court on April 21, 2015 had issued a stay order against ZO Rooms then. Despite that legal battle, in late 2015, OYO was reported to have explored a potential acquisition of ZO Rooms. However, after more than two years of speculation, the merger fell flat in 2018.

Zostel Hospitality was founded in August 2013 by Dharamveer Chouhan, Akhil Malik, Paavan Nanda, Tarun Tiwari, Chetan Singh Chauhan, Abhishek Bhutra and Siddharth Janghu with an initial corpus of $30K (INR 20 Lakh). The startup has two hospitality brands i.e. ZO Rooms and Zostel.

Soon after the potential merge talks failed, Gurugram-based OYO filed a complaint against Zostel Hospitality alleging continuous inconvenience and harassment by Zostel founders. OYO filed a criminal complaint against the founders of Zostel on January 16, 2018, under Section 405, 406, 415, 420, 425 and 426 pertaining to criminal breach of trust, cheating and misrepresentation of data, said the company in a statement.

Zostel in a separate petition filed on February 2, 2018 alleged that OYO had acquired its data of employees, assets, hotel properties under the pretext of accelerating the process of acquisition and is now refusing to pay the dues for the business acquired. OYO alleged that this was misconceived and baseless.

“These allegations relate to a long expired and non-binding term sheet. It is absolutely false to suggest that OYO benefited from talks of the deal since the Zo business had been faltering at that stage. There was also no response to a list of issues identified during our diligence process, including significant liabilities and unpaid dues as well as undisclosed contingent liabilities,” OYO said at the time.

OYO also alleged that it had been inconvenienced and harassed by Zostel and its directors, and claimed Zostel was “intimidating and pressuring us to submit to their unreasonable demands.”

Following a months-long legal battle, the Supreme Court, in an order dated September 19, 2018, accepted the arbitration petition by Zostel and appointed Justice Ahmadi as the sole arbitrator.