In a major ruling that underscores the importance of clarity in commercial agreements, the Delhi High Court has allowed a petition filed by Oravel Stays Pvt. Ltd. (OYO), setting aside an arbitral award that had favored Zostel Hospitality Pvt. Ltd. The Court held that in the absence of consensus on key terms of a business deal, the Arbitral Tribunal’s finding entitling Zostel to specific performance was unsustainable in law and contrary to public policy.
Credits: Mint
Background: The Clash of Hospitality Startups
The dispute traces back to 2015, when OYO and Zostel, two rising players in India’s budget hospitality sector, entered into a Term Sheet for the acquisition of Zostel’s assets, including intellectual property and key employees, by OYO. While Zostel claimed it fulfilled its obligations under the Term Sheet, OYO maintained that the document was non-binding and served only as a framework for future negotiations.
As tensions escalated, Zostel initiated arbitration proceedings, alleging that OYO backed out of the acquisition despite their compliance. After a legal back-and-forth—including failed petitions under Section 9 and Section 11 of the Arbitration and Conciliation Act—the Supreme Court ultimately constituted an Arbitral Tribunal. This Tribunal ruled in Zostel’s favor, stating that it was entitled to specific performance of the acquisition deal.
OYO’s Challenge and the Court’s Reasoning
OYO approached the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the arbitral award. The company contended that the award was flawed, as there had been no meeting of minds (consensus ad idem) on the definitive agreements.
Justice Sachin Datta, presiding over the case, agreed with OYO. He noted that the Arbitral Tribunal’s own findings acknowledged the absence of consensus on crucial terms of the agreement. Despite this, the Tribunal had declared Zostel “entitled” to seek specific performance—a contradiction that the Court could not overlook.
“It has been found in the award itself that there is no consensus ad idem in respect of the terms of the envisaged ‘definitive agreements’… The impugned award is in conflict with the public policy of India,” the Court observed.
Arbitrator’s Contradictions
The judgment sharply criticized the Arbitrator’s decision to grant Zostel the right to pursue specific performance in other legal proceedings, despite holding that it was already entitled to it. The Court found this incongruous and incomplete, essentially amounting to an omission to fully adjudicate the central issue of the arbitration.
“The Tribunal had the jurisdiction to grant or deny specific performance. By deferring the matter to another proceeding, it failed to resolve the most critical dispute between the parties,” the Court remarked.
Legal Implications: Binding vs Non-Binding Documents
The case highlights a crucial aspect of commercial law: term sheets, unless expressly binding and mutually agreed upon, cannot form the basis of specific performance. The Court emphasized that a contract lacking agreement on material terms is unenforceable under Indian law.
This verdict reaffirms a key principle—specific performance is not available unless the contract is definitive and clear. Any ambiguity or incompleteness in agreements, especially in high-stakes corporate transactions, can prove fatal in court.
Conclusion: A Precedent for Business Certainty
With this ruling, the Delhi High Court has effectively set a strong precedent for business transactions in India. It sends a clear message: binding commitments cannot arise out of preliminary, non-binding term sheets, even if parties act on them informally.
For OYO, this is a significant legal victory that removes uncertainty from a years-long dispute. For startups and companies engaging in M&A or strategic partnerships, the ruling is a reminder to formalize deals carefully—because in the eyes of the law, intent without clarity is no contract at all.
