OYO v. Zostel: Arbitral award against OYO violates public policy, says Delhi High Court

The Delhi High Court has ruled that the arbitral award passed in 2021 against Oravel Stays Private Limited (OYO) on its dispute with Zostel Hospitality Private Limited (Zostel) was against public policy, since it was based on a Term Sheet that was not binding. .The Court made the observation while setting aside the arbitral award, which had upheld Zostel's claim to a 7% stake in OYO. The Court has ruled that the 2015 Term Sheet between the two entities was expressly non-binding and could not be enforced.The Court 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 delivered the verdict on May 13, 2025, in a petition filed by OYO 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 dispute arose from a Term Sheet executed on November 26, 2015, between OYO, Zostel, and certain Zostel shareholders, including Tiger Global and Orios Venture Partners. The document contemplated OYO’s acquisition of Zostel’s identified assets—its technology, intellectual property, employees, and hotel supply network—in exchange for Zostel shareholders receiving a 7% equity stake in OYO.The Term Sheet expressly stated that it was non-binding, except for specific clauses such as confidentiality, exclusivity, and governing law. It also made clear that the transaction would be consummated only upon execution of definitive agreements. Zostel claimed it had fulfilled all its obligations under the Term Sheet, including transferring personnel and customer data to OYO, and initiated arbitration in 2018 when the transaction did not materialise.In its arbitral award dated March 6, 2021, the sole arbitrator found that while the Term Sheet was labelled non-binding, the conduct of the parties made it enforceable. The tribunal held that Zostel was “entitled” to specific performance of the agreement, but refrained from directing OYO to allot shares, instead permitting Zostel to seek such relief in further proceedings..OYO challenged this award before the High Court. The High Court rejected the arbitral tribunal’s reasoning, holding that the award was unsustainable in law and conflicted with the fundamental principles governing contractual enforceability."The Term Sheet expressly and unequivocally states that it is ‘non-binding,’" the Court noted.It pointed out that the Term Sheet had specifically carved out only five clauses as legally binding. “Had the parties intended that all the provisions of the Term Sheet be made binding, there would have been no occasion to incorporate an express stipulation to the contrary," the High Court reasoned. .The Court also faulted the arbitral tribunal for failing to decide the principal relief sought, namely the issuance of 7% equity shares to Zostel’s shareholders.“Such omission virtually sets at naught the entire adjudication exercise before the Arbitral Tribunal,” Justice Datta remarked..On the issue of specific performance, the Court held that there was no concluded contract, since the parties had not reached consensus on critical elements of the transaction, such as the Share Subscription Agreement, Shareholders’ Agreement, and Business Transfer Agreement. The Court took strong exception to the tribunal’s direction that Zostel (respondent/ claimant) could pursue "appropriate proceedings for specific performance and execution of definitive agreements."The Court found that the tribunal had effectively permitted proceedings for the specific performance of an agreement whose material terms have not been agreed upon by the parties.“There can be no specific performance in a situation where there is no agreement between the parties as to the most material terms ... Permitting proceedings for specific performance of an agreement of which the material terms have not been agreed upon is contrary to the basic tenets of Indian law of contract and specific performance," the Court said..The Court underscored that Indian law does not permit courts or tribunals to enforce incomplete or tentative agreements through specific performance, especially where key commercial terms remain unsettled.Concluding that the award was “in conflict with the public policy of India,” the Court invoked Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 to set it aside. The judgment reiterated that arbitral awards must not contravene settled legal principles and public policy standards. “For the above reasons, the impugned award is in conflict with the ‘public policy of India’ and is, consequently, liable to be set aside," it concluded. .OYO was represented by Senior Advocate Mukul Rohtagi with Advocates Anuradha Dutt, Lynn Pereira, Suman Yadav, Haaris Fazili, Kunal Dutt, Raghav Dutt, Keshav Sehgal, Avinash Singh, Seema Mehta and Prachi Pandey..Zostel was represented by Senior Advocate Abhishek Malhotra with Advocate Srishti Gupta, Kartikay Dutta, Raghav Shukla, Anukriti Trivedi, and Sonal Chhablani..[Read Judgment]