Delhi High Court sets aside arbitral award entitling Zostel to 7% stake in OYO

The Delhi High Court on Tuesday set aside an arbitral award ruling that Oravel Stays (parent company of OYO) acted in breach of a binding agreement after its acquisition of rival Zostel Hospitality (which owns ZO Rooms), whereby it had agreed to transfer 7 percent of OYO to ZO Rooms' shareholders..Justice Sachin Datta said that the order will be uploaded in a couple of days after the typographical errors are rectified. .The judgment was passed in a plea filed by Oyo under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the award.The long-running dispute between Zostel and OYO stems from a 2015 deal under which OYO proposed to acquire Zostel’s hotel business. In return, Zostel’s shareholders were to receive a 7% equity stake in OYO. While the term sheet was labelled non-binding except for clauses related to confidentiality, exclusivity and dispute resolution, it outlined key transactional steps including the transfer of assets and execution of definitive agreements.Zostel claimed it fulfilled its obligations, including transferring its hotel business and staff to OYO, but the definitive agreements were never signed. It alleged that OYO reneged on the deal, primarily due to objections raised by a minority investor, Venture Nursery. In response, Zostel initiated arbitration proceedings in 2018..In an award passed on March 6, 2021 by a former Chief Justice of India, the arbitral tribunal ruled that Zostel was entitled to specific performance of OYO’s obligations under the term sheet. However, since definitive agreements had not been executed and no complete consensus existed on their terms, the tribunal did not order allotment of shares. Instead, it allowed Zostel to pursue appropriate proceedings for execution of the definitive agreements.Zostel then approached the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 seeking to restrain OYO from altering its shareholding - including via its proposed initial public offering (IPO) - on the ground that it would frustrate enforcement of the arbitral award.On February 14, 2022, Justice C Hari Shankar of the Delhi High Court dismissed Zostel’s plea. The Court held that the arbitral award merely entitled Zostel to seek specific performance and did not crystallise into an enforceable right to shares. As such, there were no “fruits” of the award that required protection under Section 9, it was held. The Court also rejected Zostel’s argument that an IPO would make enforcement impossible, stating there was no binding contractual bar against listing and no outstanding rights that violated the Securities and Exchange Board of India (Issue of Capital and Disclosure Regulations, 2018)..Oyo was represented by Senior Advocate Mukul Rohatgi with Advocates Anuradha Dutt, Lynn Pereira, Suman Yadav, Haaris Fazili, Kunal Dutt, Raghav Dutt, Avinash Singh, Keshav Sehgal and Prachi Pandey from DMD Advocates and Solicitors..Zostel was represented by Senior Advocate Abhishek Malhotra with Advocate Sonal Chhablani.