The Delhi High Court has set aside an arbitral award that had entitled Zostel to a 7% stake in OYO. The Court ruled that no enforceable agreement existed between the two parties.
In a recent development, the Delhi High Court has cancelled an arbitral award that had earlier ruled against Oravel Stays, the parent company of OYO, in a long-standing dispute with Zostel Hospitality, which owns ZO Rooms.
The case goes back to a deal made in 2015, where OYO had planned to acquire Zostel’s hotel business. In return, Zostel’s shareholders were supposed to get 7% equity in OYO.
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However, things didn’t go as planned, and the issue ended up in arbitration and later in court.
Justice Sachin Datta of the Delhi High Court, who passed the judgment on Tuesday, said that the final order “will be uploaded in a couple of days after the typographical errors are rectified.”
The judgment came on a petition filed by OYO under Section 34 of the Arbitration and Conciliation Act, 1996. OYO had challenged the arbitral award, which was passed on March 6, 2021.
The main issue started in 2015 when OYO and Zostel made a deal through a term sheet.
This term sheet was marked as non-binding, except for a few important clauses related to confidentiality, exclusivity, and dispute resolution.
However, it did outline some important steps, such as transfer of Zostel’s hotel assets and execution of definitive agreements.
Zostel claimed it fulfilled its part of the deal by transferring its hotel business and staff to OYO.
But according to Zostel, OYO did not move forward with signing the final documents, mainly because of objections raised by a minority investor called Venture Nursery.
Because of this, Zostel started arbitration in 2018. The arbitration panel, which included a former Chief Justice of India, ruled that Zostel was eligible to seek specific performance of OYO’s obligations mentioned in the term sheet.
However, the tribunal did not go so far as to order that the 7% shares be directly given to Zostel. The panel said that the final agreements were not signed and there was no full agreement on the terms.
The award instead allowed Zostel to go ahead with other legal steps to make OYO complete those agreements.
After the arbitral award, Zostel went to the Delhi High Court again under Section 9 of the Arbitration and Conciliation Act, 1996.
This time, Zostel tried to stop OYO from changing its shareholding, especially because OYO was planning to launch its Initial Public Offering (IPO). Zostel argued that if OYO changed its shareholding or launched an IPO, it would be hard to enforce the arbitral award later on.
However, on February 14, 2022, Justice C Hari Shankar of the Delhi High Court rejected Zostel’s request. The Court said that the arbitral award only allowed Zostel to ask for specific performance; it didn’t give Zostel any final or enforceable right to the shares.
The Court explained that since there were no final rights created by the award, there was nothing to protect under Section 9.
The Court clearly stated:
“The arbitral award merely entitled Zostel to seek specific performance and did not crystallise into an enforceable right to shares.”
The Court also rejected Zostel’s claim that an IPO would prevent the enforcement of the award, 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).”
The legal teams involved in this high-profile dispute included some senior legal experts. OYO was represented by Senior Advocate Mukul Rohatgi, along 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, on the other hand, was represented by Senior Advocate Abhishek Malhotra along with Advocate Sonal Chhablani.
This decision by the Delhi High Court has brought a significant turn in the long dispute between OYO and Zostel.
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The outcome clearly shows how important it is to have proper and signed definitive agreements in place when dealing with business acquisitions.
Even if both sides act on a term sheet, unless a complete agreement is signed, it may not be enforceable in court.
The case also highlights the role of minority investors and regulatory clarity during business mergers and IPOs.
The final detailed order from Justice Sachin Datta is still awaited and will be made available after all “typographical errors are rectified.”
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