Imagine handing over the lifeblood of your startup, your confidential customer databases, your proprietary software architecture, and your key employees to a fierce rival, entirely on the premise of a document that loudly proclaims "NON-BINDING" across its header. For most people, this sounds like an egregious breach of basic transactional hygiene. Yet, in the high-stakes, fast-moving ecosystem of Indian startup acquisitions, this exact scenario played out between Zostel and OYO (Oravel Stays), culminating in one of the most fiercely contested corporate legal battles of the decade.

At the heart of this dispute lies a deceptively simple question: "Can the post-signing conduct of the parties override the explicit 'non-binding' nature of a Term Sheet?"

The Arbitral Tribunal initially said yes. In March 2021, the sole arbitrator concluded that OYO had breached the binding term sheet. The Delhi High Court, in Oravel Stays Private Limited v. Zostel Hospitality Private Limited, 2025:DHC:3661, in May 2025, set aside that award. Zostel then tried to challenge the ruling directly before the Supreme Court (SC), which in July 2025 declined to entertain the plea and told Zostel to pursue its statutory appeal instead. That appeal is still pending before the Division Bench of the Delhi HC, so this is not yet the final word on the dispute.

The Anatomy of the Deal (and the Consequent Fallout)

To understand the legal context, it is necessary to briefly review the facts. In November 2015, OYO and Zostel entered into a Term Sheet under which OYO agreed to acquire the assets of Zostel. The equity share consideration for this transfer of assets was up to 7% in OYO to be held by Zostel's founders and investors. The document was an early-stage instrument which contained binding provisions for exclusivity, confidentiality and express representation that the core commercial terms, the acquisition and the equity swap were not binding and subject to due diligence and execution of the Definitive Agreements.

The result was a “mish-mash” of what was considered “due diligence” and “full-scale business integration.” Zostel argued that it had met its "closing obligations" by releasing proprietary business information, transferring its hotel assets to the OYO chain and allowing its employees to be absorbed. But the eagerly awaited Definitive Agreements were never signed, with OYO walking away from the deal citing discrepancies that emerged during the due diligence process, which resulted in Zostel being stripped of its core assets and losing the proposed 7% stake in the company.

The Tribunal agreed with Zostel, holding that its irrevocable steps toward closing, effectively ceding control of its business operations, had waived the Term Sheet's non-binding preamble and rendered it enforceable, an unusual and radical departure from the orthodox position that written non-binding clauses control over subsequent conduct. Notably, the Tribunal stopped short of directing OYO to actually issue the shares: it held Zostel "entitled" to specific performance but left the mechanics to a further round of proceedings.

The Doctrine of Consensus Ad Idem and "Agreements to Agree"

The legal dispute between OYO and Zostel hinges on consensus ad idem (a meeting of the minds). Under Section 10 of the Indian Contract Act, 1872, an agreement becomes an enforceable contract only when parties agree upon the exact same thing in the same sense.

By its very nature, a standard M&A Term Sheet is an agreement to agree. It's an understanding where parties just agree to negotiate and set the key terms of the contract at some point in the future without a “meeting of the minds” at the moment. In Mayawanti v. Kaushalya Devi, (1990) 3 SCC 1, the Supreme Court held that courts must determine when, if at all, negotiating parties reached agreement, and that later negotiations remain material if the agreement is rescinded. On the basis of this, the Tribunal has recorded that there was no consensus "ad idem" between the parties in relation to Definitive Documents and that the Definitive Documents were not finalized due to the objections raised by the OYO's minority shareholders. The Term Sheet was an offer of a binding document and the Claimant did everything possible to meet their obligations under the Term Sheet.

The Arbitral Tribunal created an internal legal contradiction in its ruling. On one hand, it acknowledged that the parties failed to reach consensus ad idem regarding the Definitive Documents due to shareholder objections. On the other hand, it simultaneously held the Term Sheet binding and declared Zostel entitled to specific performance simply because Zostel had fulfilled its preliminary obligations.

The Delhi HC did not disturb the Tribunal's finding that the term sheet had become binding through conduct, holding that a merits review of that kind falls outside the narrow scope of Section 34 of Arbitration and Conciliation Act, 1996. Instead, it set the award aside on two narrower grounds. First, the award never actually granted or refused specific performance. It simply held Zostel "entitled" to it and then relegated Zostel to a fresh round of proceedings to execute the definitive agreements, an approach the Court held amounted to an omission to decide a material issue going to the root of the dispute. The Tribunal had also never ruled on OYO's defence that the term sheet was a determinable contract under Section 14 of the Specific Relief Act. Second, and more fundamentally, the Tribunal's own finding that there was no consensus ad idem on the definitive agreements meant that its conclusion that Zostel was "entitled" to specific performance could not stand.

Conduct vs. Clauses: Does Part Performance Cure Vague Contracts?

Zostel's strongest argument, and the one that swayed the arbitrator, was grounded in equity: Promissory Estoppel and Part Performance. Zostel effectively asked: "If the Term Sheet was non-binding, why did OYO accept our assets and absorb our business?" This raises a fascinating intersection between the Indian Contract Act, 1872 and the Specific Relief Act, 1963. Can subsequent conduct retrospectively alter the nature of a foundational document?

The HC's answer was narrower than an outright rejection of Zostel's theory. Having already declined to disturb the Tribunal's finding that conduct had rendered the Term Sheet binding, the Court instead held that even a binding term sheet cannot support an order of specific performance where the parties were never ad idem on the essential terms of the Definitive Agreements that were meant to follow it. By transferring its assets before signing the Definitive Agreements, Zostel committed a fatal tactical error. In the eyes of the HC, Zostel's premature asset transfer might give rise to a claim for damages or restitution for the value of the assets lost or intellectual property infringed, but it could not substitute for the missing consensus on the Definitive Agreements' material terms, without which no order of specific performance could follow.

The Zostel-OYO saga lays bare a structural vulnerability in Indian M&A practice: the glaring absence of pre-contractual liability. In Civil Law jurisdictions such as Germany and France, Zostel's predicament, transferring the lifeblood of its business prior to definitive agreements would almost certainly invoke the doctrine of culpa in contrahendo (fault in contracting). This principle inherently imposes a duty of good faith during the negotiation phase. If an acquirer strings a target along, inducing them to act to their detriment before abruptly walking away, civil courts readily intervene to award substantial reliance damages.

The reversal of the arbitral award by the Delhi HC allows M&A practitioners to breathe a sigh of relief. It upholds the sanctity of the written word over ambiguous post-signing conduct. However, it also serves as a stark reminder of how easily deals can derail into years of agonizing litigation. To prevent the next Zostel-OYO scenario, transaction lawyers must fundamentally rethink how they handle the interim period between the Term Sheet and closing.

Conclusion: Why "Good Faith" Is Not Enough

The Zostel-OYO conflict highlights a critical friction point in modern corporate deal-making, where startup agility clashes with the strict requirements of contract law. In the rush to take an exit, commercial teams often view legal documentation as a formality, treating Term Sheets as good-as-done deals.

The Delhi HC's intervention, provisional as it currently stands, is an important corrective signal for Indian M&A. It reinforces that courts will not compel a party to complete a transaction whose essential terms were never agreed upon, however far the parties' conduct had travelled down that road. A Term Sheet is a roadmap, not the destination. If a party chooses to hand over the keys to its business while still standing on the roadmap, it cannot expect a judge to force the other party to complete the journey merely because the journey was already well underway.

The stakes are not merely academic. As OYO's parent, PRISM, pursues a ₹6,650 crore IPO, Zostel has separately approached SEBI over the company's disclosures relating to its claimed stake, a reminder that the underlying dispute is still live and commercially consequential even as it awaits final adjudication.

Author is a 4th year B.A. LL.B. student at Lloyd Law College, Greater Noida. Views are personal.