OYO-Zostel Dispute: Big Lessons for Startups on Term Sheets

In the business world, when companies explore mergers, acquisitions, or fundraising, the process often begins with a term sheet. A term sheet sets out the parties’ initial understanding of the proposed deal. Generally, these documents are non-binding and open to modification except for clauses on confidentiality, exclusivity, and dispute resolution, which are typically enforceable.

However, when deals fall through, a key question arises: can a term sheet itself be legally binding? The Delhi High Court recently addressed this issue in the case between OYO (Oravel Stays Pvt. Ltd.) and Zostel Hospitality Pvt. Ltd., offering important guidance on how such documents should be interpreted under Indian law.

What Led to the Dispute

In 2015, OYO and Zostel signed a term sheet outlining OYO’s plan to acquire Zostel’s assets, including its intellectual property and employees. Venture capital firms Tiger Global and Orios were also involved in the deal. The term sheet explicitly stated that it was non-binding, except for a few provisions.

Disagreements arose when Zostel claimed it had fulfilled its obligations under the arrangement, while OYO backed out, arguing that the term sheet did not create binding commitments. This led Zostel to initiate arbitration proceedings, which OYO opposed.

Arbitral Tribunal’s View

The Arbitral Tribunal examined both the written agreement and the conduct of the parties after signing it. Zostel had transferred employees and shared confidential information, which OYO accepted without objection. To the Tribunal, this demonstrated that both sides were serious about moving forward with the transaction.

On this basis, the Tribunal concluded that the term sheet was more than a mere expression of intent and carried binding effect. However, it stopped short of compelling OYO to complete the acquisition. Instead, it held that Zostel was entitled to pursue specific remedies in subsequent legal proceedings.

Delhi High Court’s Verdict

OYO challenged the arbitral award before the Delhi High Court under Section 34 of the Arbitration and Conciliation Act. The Court took a different approach, focusing on the plain wording of the term sheet, which explicitly stated that it was non-binding except for five specified clauses. Relying on the Supreme Court’s decision in Bank of India v. K. Mohandas, the Court held that subsequent conduct cannot override the clear language of a contract.

It further observed that allowing the Tribunal to treat a non-binding document as binding, based solely on the parties’ later behaviour, would conflict with settled principles of contract law.

While the Court acknowledged that Section 34 permits only limited interference with arbitral awards, it nevertheless set aside the award on the ground that it violated public policy. Importantly, it did not undertake a full merits review of the Tribunal’s reasoning, as such scrutiny is not permissible under Section 34.

International Comparison

Unlike courts in jurisdictions such as the U.S. and U.K., the Delhi High Court adopted a more cautious, text-based approach. In some foreign courts, the parties’ conduct after signing a term sheet may influence whether it is treated as binding, even if the document itself says otherwise. For example, U.S. courts may enforce agreements where key terms are settled and there is evidence of partial performance, while English courts often examine whether the parties intended to create legal relations.

In contrast, Indian courts, as illustrated in this case, place stronger weight on the written language of the agreement. This makes precision in drafting especially critical in the Indian context.

Conclusion

The ruling in OYO v. Zostel highlights a critical lesson for businesses: clarity in drafting term sheets is paramount. If a term sheet is not intended to be legally binding, it must state this unambiguously particularly in high-value transactions involving sensitive information and employee movement.

The judgment also reaffirms that Indian courts give primacy to the written word of the contract over the subsequent conduct of the parties. For buyers and investors, the case serves as a reminder to carefully limit legal obligations during preliminary negotiations and to avoid ambiguity in the language of term sheets.