OYO v. Zostel: Delhi High Court Says Arbitral Award Violates Public Policy judgement dispute

OYO v. Zostel: Delhi High Court 

In a major development in the ongoing legal battle between hospitality giants OYO and Zostel, the Delhi High Court has set aside the arbitral award that was previously passed in favor of Zostel. The Court held that the award was in violation of the public policy of India, giving a fresh twist to the long-standing merger dispute.

Fact of the Dispute:

The origins of the case go back to 2018 when Zostel Hospitality (which operates the ZO Rooms brand) claimed that OYO had agreed to acquire its business, including assets and employees, in exchange for a 7% stake in OYO’s parent company, Oravel Stays Pvt. Ltd.

Zostel alleged that the agreement was finalized in a Term Sheet and that they had completed their part of the deal. However, OYO later backed out, stating that the transaction was never legally concluded, as the final definitive agreements were not signed.

This led to arbitration between the two parties. In 2021, the arbitral tribunal ruled in favor of Zostel, stating that the Term Sheet was binding and that Zostel was entitled to the execution of the definitive agreements.

Delhi High Court’s Judgment (May 2024)

OYO challenged the arbitration award before the Delhi High Court. In May 2024, the court set aside the arbitral award, citing that:

• Violation of Public Policy: The court ruled that enforcing the award would be against the public policy of India. According to the court, forcing OYO to transfer shares based on a non-binding term sheet would set a bad precedent and could have serious implications for future commercial negotiations in India.

• No Concluded Contract: The judgment emphasized that a term sheet, by its nature, is a document of intent and not a final binding contract. The definitive agreements, which were essential to finalize the transaction, were never executed.

• Tribunal Overstepped Authority: The court noted that the arbitral tribunal had gone beyond the scope of the term sheet by directing share allotment without a concluded contract.

Legal Issues

1. Is a Term Sheet Binding?
   The Court clarified that while term sheets may indicate intention, they are not binding unless explicitly stated. Without a definitive agreement, there is no concluded contract to enforce.

2. Scope of Arbitral Authority
   The tribunal cannot create new contractual obligations that were never finalized by the parties. Doing so would breach the statutory limits of arbitral jurisdiction.

3. Public Policy Under Section 34, Arbitration and Conciliation Act
   An arbitral award can be set aside if it contravenes India’s public policy. The court interpreted this to include safeguarding principles of contract law and ensuring commercial certainty.

What This Means for Indian Startups and Investors

This judgment is a landmark for India’s startup and venture ecosystem. It reinforces that preliminary documents like term sheets, unless carefully worded, do not create binding legal obligations. It also underlines that arbitration awards will be scrutinized if they attempt to enforce incomplete or ambiguous deals.

Conclusion

The OYO v. Zostel saga serves as a cautionary tale about the importance of drafting precise legal documents and not treating initial negotiations as binding commitments. The Delhi High Court’s judgment prioritizes commercial clarity and legal certainty, sending a strong message that incomplete agreements cannot be enforced through arbitration or otherwise.