OYO vs Zostel: Delhi HC Rejects ZO Rooms' 7% Equity Claim - Inside the Merger Fallout

The Delhi High Court has set aside an arbitral award in its dispute with Zostel Hospitality, which owns ZO Rooms. The court ruled that OYO did not act in breach of an agreement following acquisition discussions with Zostel. In addition, it also dismissed Zostel’s execution petition.

The court order also substantiates OYO’s position that no part of Zostel’s business was transferred to the hospitality giant and that a determinable contract cannot be specifically enforced, in line with established precedents from the Supreme Court of India.

Justice Sachin Dutta passed the order on a plea filed by OYO under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the ruling. “The final order will be uploaded in a couple of days after the typographical errors are rectified,” said Dutta.

The case started when a tribunal headed by former Chief Justice of India (CJI) Aziz Mushabber Ahmadi had ruled that OYO’s parent company --- Oravel Stays --- acted in breach of a binding agreement to acquire Zostel.

“This ruling vindicates OYO’s position and puts to rest the contention that there was any binding, definitive agreement between the parties. The court has recognised that no definitive agreements were executed, no consensus was reached, and essential commercial aspects of the potential transaction were never finalised,” OYO said in its official statement.

OYO vs Zostel

The dispute started in 2015 when two parties signed an agreement for acquisition of Zostel’s budget hotel offering. According to the deal, the shareholders of ZO Rooms were supposed to receive a 7% equity stake in OYO. However, the deal did not materialise due to due diligence process failure and lack of consensus.

And in 2017, OYO clarified that it was no longer involved in acquisition talks with Zostel after entering into an alleged “non-binding term sheet”. At that time, Ritesh Agarwal-led company stated that both parties had mutually decided to call off the non-binding term sheet, citing factors such as Zostel’s failure to complete due diligence and challenges related to transaction restructuring.

But Zostel had different explanation in this regard. It claimed that OYO had postponed the deal after acquiring the data of its employees, hotel properties, and assets. It also filed a petition before the arbitration tribunal in February 2018, seeking $1 million in relief and 7% shareholding in OYO as promised in the term sheet.

In March 2021, the tribunal found that OYO had violated the binding agreement and allowed Zostel to initiate legal proceedings to enforce the definitive agreements. After this, Zostel also approached the Delhi High Court seeking to prevent OYO from modifying its shareholding structure, particularly through its planned IPO.