In a decisive verdict, the Delhi High Court has nullified the 2021 arbitration award that had upheld Zostel Hospitality's claim to a 7% equity stake in Oravel Stays Pvt. Ltd. (OYO). The Court determined that the award was legally untenable as it relied on a Term Sheet that was explicitly non-binding and hence unenforceable under Indian law.

Basis of the Dispute: A Non-Binding Term Sheet
The origin of the dispute lies in a Term Sheet signed on November 26, 2015, involving OYO, Zostel, and certain shareholders including Tiger Global and Orios Venture Partners. The document outlined OYO’s potential acquisition of specific Zostel assets—namely its tech platform, IP, employee base, and hotel network—in return for Zostel shareholders receiving a 7% equity stake in OYO. However, the Term Sheet was marked non-binding except for a few provisions such as confidentiality and exclusivity. Importantly, it stated that the transaction would proceed only upon execution of final and definitive agreements.

Arbitration Proceedings and Award in 2021
When the deal failed to materialize, Zostel initiated arbitration in 2018, alleging it had already transferred its key assets and fulfilled its obligations. On March 6, 2021, the arbitral tribunal sided with Zostel, holding that although the Term Sheet was labeled non-binding, the parties' conduct gave it legal enforceability. The arbitrator stopped short of ordering share allotment but held that Zostel was “entitled” to specific performance and could pursue further proceedings to secure the shares.

OYO’s Challenge and the Court’s Verdict
OYO contested the arbitral award in the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996. Justice Sachin Datta, who presided over the matter, ruled in favor of OYO on May 13, 2025. The Court held that there was no concluded contract between the parties, and thus, no grounds for awarding specific performance. It noted that the tribunal's decision effectively sought to enforce an incomplete agreement, which runs contrary to established principles of contract law in India.

Failure to Establish a Binding Contract
A significant portion of the Court’s reasoning focused on the absence of a "consensus ad idem"—a meeting of minds—on essential commercial terms such as the Shareholders’ Agreement, Share Subscription Agreement, and the Business Transfer Agreement. These elements, the Court stressed, are crucial in validating a transaction of this nature. Without mutual agreement on such material components, there can be no enforceable contract, let alone grounds for specific performance.

Court’s Disapproval of Tribunal’s Approach
The Court also found fault with the arbitral tribunal for not addressing the core relief sought—i.e., the actual issuance of shares to Zostel. Instead, the tribunal allowed Zostel to initiate further legal steps to pursue share allotment. The Court considered this an improper and incomplete adjudication of the dispute. It emphasized that such directions could mislead parties into seeking enforcement of a non-existent agreement, thereby creating legal uncertainty.

Public Policy Consideration and Legal Incompatibility
One of the most crucial findings was that the award clashed with the public policy of India. Under Section 34(2)(b)(ii) of the Arbitration Act, arbitral awards that conflict with Indian legal principles or public interest can be set aside. The Court concluded that enforcing a non-binding and incomplete document through arbitration was fundamentally flawed and against the public interest, making the award liable to be quashed.

Implications for Investors in OYO’s Unlisted Shares
This verdict offers important clarity for investors keeping an eye on OYO’s unlisted shares. With the Court rejecting Zostel's claim, the risk of unexpected equity dilution is significantly reduced. This outcome could reinforce investor confidence in OYO’s ownership structure and may positively impact the valuation in the unlisted market. Legal certainty in such high-stakes matters is often a key consideration for institutional and HNI investors dealing in pre-IPO stocks.

Final Take: Legal Clarity Reasserted for Private Market Participants
The High Court’s decision reaffirms that non-binding documents, even when partially executed in spirit, cannot form the basis of equity claims or enforceable contracts. For participants in the unlisted equity market, especially those tracking OYO’s trajectory, this ruling eliminates a major legal overhang. It signals that courts will uphold contractual discipline and will not permit enforcement of vague or tentative deals—setting a clear precedent for future corporate disputes.