Delhi High Court: In a petition filed under Section 34 Arbitration and Conciliation Act by Oravel Stays Private Limited (petitioner) seeking to assail an arbitral award dated 06-03-2021 (impugned award) passed by an arbitral tribunal comprising of a Sole Arbitrator, Sachin Datta, J. set aside impugned award being in in conflict with the “public policy of India”.
The present dispute arose between Oravel Stays Private Limited which operates under the brand name “OYO,” and Zostel Hospitality Private Limited (the respondent), known for operating hostels under the brand name “Zostel” and formerly running a hotel aggregation business under “Zo Rooms.” Both parties operate within the competitive budget hospitality sector in India. The genesis of the present legal battle lies in a Term Sheet executed on 26-11-2015 between the petitioner, the respondent, and two investors, Internet Fund III Pte. Ltd. (Tiger Global) and Orios Venture Partners. This Term Sheet outlined a proposed acquisition of Zostel’s business by OYO, covering assets like intellectual property, employees, and customer base. However, while Zostel claims it fulfilled all obligations under the Term Sheet, OYO disputes the binding nature of the agreement and asserts that it was merely a preliminary, non-binding arrangement that was later terminated.
The dispute intensified after the respondent-initiated arbitration proceedings by invoking the arbitration clause in the Term Sheet on 25-01-2018. OYO rejected the arbitrability of the claims, asserting that the Term Sheet was non-binding and objected to the appointment of an arbitrator. Initial attempts at seeking interim relief and appointment of an arbitrator before Indian courts faced jurisdictional challenges, ultimately leading to the constitution of an Arbitral Tribunal by the Supreme Court on 19-09-2018. The respondent and its shareholders then filed a Statement of Claims seeking specific performance of the Term Sheet and monetary damages. The petitioner opposed the Tribunal’s jurisdiction, especially over non-signatory claimants, and reiterated its stand that no binding agreement existed. The current petition was filed by OYO under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the arbitral award on various grounds including jurisdiction, enforceability of a non-binding document, and arbitrability of the claims.
On the aspect of jurisdiction, the Court noted that on a plain reading of the arbitration clause in the Term Sheet which extends to “any dispute between the parties arising from or relating to this term-sheet”. Thus, for the purpose of dispute resolution clause, there is no distinction made between the “binding and the non-binding clauses”. It is also a well-established principle that an arbitration clause in an agreement is a separate and independent agreement. As such, the scope and applicability of the arbitration agreement is not controlled or contingent upon arbitration being confined only in respect of such contractual covenants which have been designated as binding. The very issue as to the binding/non-binding nature of a contractual covenant, is an aspect which falls well within the jurisdiction of an Arbitral Tribunal. Thus, the Arbitral Tribunal had jurisdiction to entertain the disputes between the parties.
The Court undertook a detailed examination of the arbitral award under challenge, primarily revolving around the legal effect and enforceability of a term-sheet dated 26-11-2015. The Arbitral Tribunal had framed a specific issue regarding whether the term-sheet, which expressly declared itself to be non-binding, had become binding due to the conduct of the parties. The Tribunal concluded that it had indeed become binding. However, the Court noted that this conclusion was tenuous, especially considering Karnataka High Court Division Bench judgment in Azeem Infinite Dwelling v. Patel Engineering Ltd, Commercial Appeal No. 60 of 2024 which held that a term-sheet requiring execution of definitive agreements does not, by itself, create binding obligations unless explicitly intended.
Despite expressing reservations about the Tribunal’s reasoning, the Court clarified that under Section 34 of the Arbitration & Conciliation Act, it could not undertake a merit-based review, especially in the context of an international award. Hence, the finding on the binding nature of the term-sheet was not interfered with. However, the Court found significant procedural infirmities in the award. It observed that although the Tribunal had found the term-sheet binding, it failed to conclusively decide the core relief sought, i.e., specific performance of issuance of 7% shareholding. The Court held that it was incumbent upon the Tribunal to either grant or deny specific performance based on its own finding. Instead, the Tribunal relegated the claimant to initiate separate proceedings, which the Court found incongruous and amounting to an omission to adjudicate a central issue.
Further, the Court noted that the Tribunal had failed to address the petitioner’s categorical objections regarding the determinable nature of the term-sheet, including evidence that the claimant had acknowledged termination of the agreement. This omission to adjudicate on material issues rendered the award vulnerable under Section 34 of the Act.
On the question of public policy, the Court held that the Tribunal’s conclusion that the claimant was “entitled” to specific performance was contrary to fundamental principles of contract law. The award itself recorded that there was no consensus ad idem on several critical terms required under Clause 7 of the term-sheet, such as, corporate structuring, asset valuation, and key agreement terms, without which no valid agreement could be said to exist. Thus, granting specific performance in the absence of agreement on essential terms violated the foundational principles of Indian contract law and thus conflicted with the public policy of India.
Ultimately, the Court found that the award suffered from serious deficiencies, including non-adjudication of core claims and material issues, as well as conflict with the fundamental principles of justice, and was therefore liable to be set aside.
[Oravel Stays Private Limited v. Zostel Hospitality Private Limited, O.M.P. (COMM) 151/2021, decided on 13-05-2025]
Advocates who appeared in this case:
Mr. Mukul Rohtagi, Sr. Adv. along with Ms. Anuradha Dutt, Mr. Lynn Pereira, Ms. Suman Yadav, Mr. Haaris Fazili, Mr. Kunal Dutt, Mr. Raghav Dutt, Mr. Keshav Sehgal, Mr. Avinash Singh, Ms. Seema Mehta and Ms. Prachi Pandey, Advocates for petitioner
Mr. Abhishek Malhotra, Sr. Adv., Ms. Srishti Gupta, Mr. Kartikay Dutta, Mr. Raghav Shukla, Ms. Anukriti Trivedi and Ms. Sonal Chhablani, Advocates for respondent
Buy Arbitration and Conciliation Act, 1996 HERE
