Founded in 2013, Zostel and OYO are two of the leading hospitality companies in India. Zostel, a private company based in Gurugram, offers hotels and homes across the country. It is headed by Dharamveer Singh Chouhan, who is the CEO and Co-founder. OYO, owned and operated by Oravel Stays, provides leased and franchised hotels, homes and living spaces. It is also located in Gurgaon and was started by Ritesh Agarwal.
In 2015, Zostel’s subsidiary ZO Rooms and OYO agreed to merge on the 26th of November. The deal was supposed to be an asset sale, with ZO Rooms founders and Tiger Global, their main investor, getting seven percent (7%) stake in OYO. However, the deal fell through and resulted in a bitter dispute between the two parties.
According to Zostel, ZO Rooms, its subsidiary, did its part under the agreement and transferred the business, but OYO failed to give 7 per cent to the shareholders of ZO Rooms. Zostel charged OYO of breaking a binding agreement after the acquisition. OYO argued that it discovered several issues during the due-diligence process, such as huge liabilities and unpaid dues. This situation quickly turned into a dispute that went to arbitration.
Complaints and counterclaims followed and in 2018, OYO filed a criminal complaint against the founders of Zostel. The complaint accused them of various offences related to criminal breach of trust, cheating and misrepresentation of data. Before this complaint, OYO had filed other criminal charges under the Information Technology Act and Copyright Act with the Cybercrime Department and the Economic Offences Wing (EOW) for stealing assets and other data. Zostel claimed OYO of stealing data of ZO Rooms during merger talks.
After the Delhi and Gurgaon High Court decided in favour of OYO, two years ago, Zostel then moved to the Supreme Court. The Supreme Court later in 2018 appointed an Arbitrator to deal with the dispute.
Zostel recently claimed that it has won the three-year legal battle against OYO, with reference to the alleged breach of a binding agreement by the latter, after the acquisition of Zostel. It also believed that if the order from the Arbitrator was to be implemented, allotment of seven per cent to ZO Rooms’ shareholders could have possibly been expected to become the largest exit in the Indian start-up ecosystem, which had the potential to surpass the Snapdeal and Freecharge Deal of $400 Million back in 2015.
As per the directions of the Supreme Court in October 2018, Justice Aziz Mushabber Ahmadi who is a former chief justice of India (CJI) was appointed as the sole Arbitrator.
The Arbitral Tribunal held that the term sheet between Zostel and OYO was a binding agreement in which OYO had breached the term sheet by not executing definitive documents due to their own internal issues. The Tribunal also recognized that the transaction was completed as ZO Rooms transferred the entire business in 2016. The tribunal added that since the breach was not caused by any fault on the part of ZO and its shareholders, ZO Room’s shareholders were entitled to the issuance of a decree of performance, directing the parties to execute a definitive agreement.
However, according to OYO, while the order noted that the non-binding term sheet was alleged to be held as binding, the term sheet itself had several key elements like assets, value, etc. including commercials that were not agreed upon in the term sheets itself. The company also said that only the legal costs were awarded as damages to ZO Rooms while the award of performance of non-binding term sheet which in itself had no agreed financials, was subjected to commencement of further proceedings and was likely to be challenged.