OYO vs ZO Rooms: Zostel says it won 3-year legal battle over alleged agreement breach; OYO refutes

by Jeremy


“if the order from the Arbitrator is to be given effect, allotment of 7 per cent to ZO Rooms’ shareholders will make this outcome the biggest exit in the Indian startup ecosystem,” Zostel said. (Image: company website)

Backpacker hostel startup Zostel on Sunday said it has won the three-year legal battle against Oravel Stays, which owns and operates hotel chain OYO, with regards to the alleged breach of a binding agreement by latter after the acquisition of Zostel that ran budget hotel chain and OYO’s smaller rival ZO Rooms. According to Zostel, ZO Rooms and OYO had entered into talks for a merger in 2015, executing an agreement on November 26, 2015. While ZO Rooms completed its obligation under the agreement and transferred the business but OYO failed to transfer 7 per cent to the ZO Room’s shareholder, which eventually led to the recently concluded Arbitration, the company added in an official statement. However, OYO maintained that there is no relief to ZO Rooms in terms of getting any OYO share ownership.

“In the most significant development, the tribunal has disallowed it while granting them the right to seek specific performance of term sheet,” OYO said in its official statement. The Ritesh Agarwal-led company also claimed that no definitive agreements are in place to consummate the transaction and that the tribunal has categorically acknowledged it; and that the definitive agreements, important documentation for any M&A transaction, were neither finalized nor agreed.

Further, the Arbitral Tribunal, Zostel said, held that the term sheet between Zostel and OYO was a binding agreement and that OYO breached the term sheet by not executing definitive documents due to OYO’s internal issue. The Tribunal also recognised that the transaction was consummated as ZO Rooms transferred the entire business in 2016. “As a result of the breach, which was not caused by any default on part of the ZO and its shareholders, ZO Rooms’ Shareholders are entitled to issuance of decree of specific performance directing the parties to execute definitive agreement,” the company said. The order was pronounced by the Arbitral Tribunal, Former Chief Justice of India, Justice AM Ahmadi on March 6, 2021.

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“Beyond the monetary compensation, it was a fight for our rights and reputation. We are extremely relieved with the judgement that the arbitral tribunal has pronounced after diligently evaluating the merits and evidences produced by us over the last 3 years,” Paavan Nanda, former Co-founder, Zostel said in the statement.

However, according to OYO, while the order noted that the non-binding term sheet is to be held as binding, the term sheet itself has several key elements like assets, value, etc. including commercials that were not agreed within the term sheets itself. The company said that only legal costs were awarded as damages to ZO Rooms even as “the award of specific performance of non-binding term sheet (which in itself has no agreed financials) is subjected to initiation of further proceedings and likely to get challenged.”

OYO was represented by lawyers including Dr. Abhishek Manu Singhvi, Salman Khurshid, among others while ZO Rooms was represented by Abhishek Malhotra, Managing Partner at Delhi-based law firm TMT Law Practice. Zostel said that “if the order from the Arbitrator is to be given effect, allotment of 7 per cent to ZO Rooms’ shareholders will make this outcome the biggest exit in the Indian startup ecosystem, surpassing the Snapdeal-Freecharge Deal of $400 Million back in 2015.”

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