Why The Delhi High Court Dismissed Zostel's 7% Claim In Oyo

In spite of a favourable arbitral award, Zostel Hospitality Pvt. failed before the Delhi High Court to lay claim to a 7% stake in Oravel Stays Pvt.—the parent entity of Oyo Hotels and Homes. This clears an important hurdle for Oravel Stays to move ahead with its initial public offer plans.

Zostel cannot use the arbitration law to obtain relief in excess of what the arbitral award grants, the high court said.

The dispute came down to—what is the “fruit” of the arbitral award?

Zostel had approached the high court seeking a stay on Oravel’s IPO basis the March 2021 arbitral award which went in its favour. Floating of the IPO by Oravel would irreversibly render execution of the award an impossibility, it told the high court.

Resisting this, Oravel told the court that the award grants Zostel effectively nothing at all, despite containing various observations in the latter’s favour.

Not in so many words, but the Delhi High Court has come to the same conclusion.

Zostel and Oravel’s dispute dates back to 2015 when the two signed a term sheet. It involved Zostel transferring its hotel business to Oravel. Against which Oravel was to transfer to Zostel “identified assets” which included 7% of its shareholding. But due to objections raised by a minority investor of Oravel, it never signed a definitive agreement with Zostel.

Zostel initiated arbitration proceedings saying the term sheet was a binding and valid contract. Oravel said it was merely exploratory.

The arbitrator noted that even as efforts were being made to resolve the minority shareholder’s issues, Zostel continued to perform its obligations as per the term sheet and Oravel made no efforts to stop it. There was a legitimate expectation from Zostel that Oravel too will comply. Since Oravel didn’t, it committed a deliberate breach of contract, the arbitrator said.

But since the definitive documents were yet to be signed, Zostel’s 7% stake claim was not upheld. What Zostel got in its favour was the right to bring “specific performance” proceedings. Meaning Zostel was allowed to initiate fresh legal proceedings to get Oravel to complete the definitive agreements.

Zostel approached the high court under Section 9 of the arbitral law that lays down interim reliefs that a court can grant before, during or after the arbitral award is granted but not enforced.

Since Oravel has challenged the award, Zostel approached the high court to seek interim relief in the form of a stay on the IPO.

An earlier Bombay High Court ruling said when the provision is used to seek interim relief after an award is passed but not enforced, “the measure of protection is intended to safeguard the fruit of the proceedings until the eventual enforcement of the award.”

Relying on this precedent, the Delhi High Court said the “fruit” of the award is that Zostel gets the right to make a claim for the 7% stake.

The arbitral award, the high court pointed out does not direct Oravel to sign the definitive agreements.

The arbitral award is a classic case of operation successful but patient dead from Zostel’s point of view at this stage, Vyapak Desai, litigation practice lead at Nishith Desai Associates, said.

The high court concluded that as on date, the right to receive 7% equity shares of Oravel has not crystallised in favour of Zostel. It reiterated the arbitrator's finding that as per the term sheet, the right to 7% would crystallise “upon closing”, which would mean execution of the definitive agreements.