Delhi HC: Arbitral Award Against OYO in Zostel Dispute Violates Public Policy

Delhi HC Sets Aside 2021 Arbitral Award Against OYO, Cites Violation of Public Policy

The Delhi High Court has set aside the 2021 arbitral award against hospitality company OYO, stating that it violated public policy as it was based on a non-binding term sheet. The dispute stemmed from a failed acquisition deal between OYO and rival Zostel Hospitality.

According to a report by Bar and Bench, the award had granted Zostel the right to claim up to a 7% stake in OYO’s parent company, Oravel Stays Pvt. Ltd. However, the court ruled that the 2015 agreement for OYO’s proposed acquisition of Zostel’s budget hotel brand, Zo Rooms, was explicitly non-binding and unenforceable.

Justice Sachin Datta delivered the verdict on May 13, allowing OYO’s petition under Section 34 of the Arbitration and Conciliation Act, 1996, which challenged the validity of the arbitral award.

“The findings in the impugned award are virtually to the effect that the claimant is entitled to specific performance despite the absence of consensus on essential terms. This amounts to granting specific performance without a complete agreement between the parties,” the court observed.

The court further noted that the arbitral award failed to adjudicate on key issues, including whether a concluded contract existed. It held that the award violated the public policy of India under Section 34(2)(b)(ii) of the Act.

Background: A Dispute Years in the Making

The conflict dates back to 2015, when OYO and Zostel signed a term sheet outlining a potential acquisition of Zo Rooms. Under the proposed deal, Zostel shareholders, including Tiger Global and Orios Venture Partners, were to receive a 7% equity stake in OYO in exchange for transferring key assets and operations.

While the term sheet included details of the proposed transaction, it was non-binding and subject to the execution of definitive agreements. OYO later stated that the deal was mutually terminated due to incomplete due diligence and unresolved structuring issues.

Zostel, however, accused OYO of backing out after gaining access to its data, workforce, and assets. In February 2018, Zostel initiated arbitration proceedings, seeking $1 million in damages and the promised equity stake.

In March 2021, the sole arbitrator ruled in Zostel’s favor, concluding that despite being labeled non-binding, the term sheet had become enforceable due to the conduct of both parties. The tribunal allowed Zostel to pursue specific relief in further proceedings.

Zostel subsequently approached the Delhi High Court and market regulator SEBI, seeking to prevent OYO from altering its shareholding structure, including via its planned IPO, arguing such actions would render the award unenforceable.

In February 2022, a division bench of the Delhi High Court dismissed Zostel’s plea, holding that the arbitral award did not confer any enforceable right to shares. A follow-up appeal by Zostel seeking a stay on OYO’s IPO was also dismissed in March 2022.

With the High Court’s latest order, the 2021 arbitration award in favor of Zostel now stands quashed.

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