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An Analysis of Oravel Stays v. Zostel Hospitality (2025 SCC OnLine Del 3377)
In investment transactions, companies often use preliminary documents, such as term sheets, before entering a potential deal and finalizing comprehensive agreements. Term sheets outline principal terms, offering a negotiation framework for the parties. Terms Sheets are frequently (if not always) drafted as “non-binding,” for the reason that they are meant to be preliminary, merely being an indication of interest without making any contractual commitments. Having said that, courts have also looked into conduct of the parties and not just the writing in the contract to assess the true intention of the parties.
Instead of accepting a “non-binding” label at face value, courts assess the document in its entirety to understand the true intention of the parties. While this subject matter, in particular validity of term sheets in investment contracts has not been adjudicated upon extensively in Indian courts, existing judicial precedents reflect that courts give emphasis not just to the specific language used in the document but the subsequent conduct of the parties, and whether all essential elements of a contract are clearly defined and agreed upon in what is to be considered as a preliminary documentation. The courts have held that while a non-binding clause is a significant indicator, it is not conclusive if the parties’ actions demonstrate a clear intent to be bound. In Rickmers Verwaltung GmbH v. Indian Oil Corporation Limited (AIR 1999 SC 504), the Supreme Court established that even a series of correspondences could form a binding contract if a clear meeting of minds on essential terms is evident. This principle was further elucidated in South Eastern Coalfields Ltd vs. S. Kumar’s Associates AKM (JV) (2021 SCC OnLine SC 486), wherein, the Supreme Court held that a letter of intent can be considered a binding contract if its acceptance is absolute and it signifies a concluded agreement on all material terms, leaving nothing significant for future negotiation. The apex court emphasized that the substance of the document, reflecting an intent to be bound, holds more weight than its title.
In Oravel Stays Private Limited v. Zostel Hospitality Private Limited (2025 SCC OnLine Del 3377), the Delhi High Court provides a fresh and detailed perspective on the legality of term sheets and whether or not they are binding on the parties.
The dispute between Oravel Stays Private Limited (“OYO”) and Zostel Hospitality Private Limited (“Zostel”) arose from a Term Sheet dated November 26, 2015, for OYO’s proposed acquisition of Zostel’s assets. This Term Sheet’s preamble explicitly stated that the term sheet was intended solely as a summary of proposed terms and was “non-binding”, save for a few clause, such as confidentiality, expenses, exclusivity, governing law and arbitration, as is typical in most investment transactions. The term sheet further stipulated that parties did not intend to be bound until they entered into definitive agreements. When the deal did not materialize as per OYO’s satisfaction, Zostel contended it had fulfilled its obligations and conducted itself in accordance with the Term Sheet, thereby making it a binding agreement. OYO maintained that the Term Sheet was non-binding and had been terminated by OYO. The matter was referred to arbitration, pursuant to the arbitration clause in the term sheet.
The arbitral tribunal, in its award dated March 6, 2021, found that the Term Sheet constituted a binding document. The tribunal reasoned that the parties, by their subsequent conduct, including Zostel facilitating the transfer of employees, properties, and customer data, and OYO conducting due diligence, had waived the non-binding nature of the preamble, thereby creating an enforceable contract. However, the arbitral tribunal also crucially found that there was no consensus ad idem between the parties on the draft definitive agreements, which were contemplated under the Term Sheet. Despite this, the tribunal held Zostel was “entitled to Specific Performance” of OYO’s obligations but directed Zostel to take appropriate proceedings for specific performance and execution of the definitive agreements.
OYO challenged this award before the Delhi High Court. The Delhi high court set aside the arbitral award due to reasons summarized below:
(a) On the “Binding Nature” of the Term Sheet: The high court disagreed with the tribunal’s conclusion that the Term Sheet became binding by conduct, especially given the document’s explicit “non-binding” language. Citing the Bank of India v. K Mohandas ((2009) 5 SCC 313), the high court emphasized that when a document is unambiguous in stating its contractual term and emphasizing it non-binding nature, subsequent conduct does not alter the effect of clear contractual terms and courts should honor that expression unless there is overwhelming contrary evidence.
(b) Omission to Adjudicate Material Issues: The court was particularly critical of the tribunal’s failure to conclusively decide on material issues such as enforceability of the Term Sheet (issuance of 7% of OYO’s shareholding by Zostel’s shareholders) and instead allowing Zostel to initiate new proceedings for specific performance.
(c) Specific Performance Without Consensus: The court found the arbitration award which stated that Zostel was “entitled” to specific performance was in fundamental conflict with the public policy of India. This was primarily because the arbitrator had concurrently found no consensus ad idem on the material terms of the definitive agreements. Placing reliance on Mayawanti v. Kaushalya Devi ((1990) 3 SCC 1), the Court reiterated that specific performance requires certainty in stipulations and terms, and parties must be consensus ad idem, without which, there is no contract to specifically enforce. “Consensus ad idem” in contract law means a “meeting of the minds.” It signifies that all parties to a contract must agree on the same thing in the same sense for the contract to be valid and enforceable.
The Oravel v. Zostel judgment underscores the critical importance of clear and unambiguous drafting in term sheets in corporate and commercial negotiations. It serves as a critical clarification on the enforceability of preliminary agreements, highlighting that even term sheets explicitly labelled “non-binding”, could expose parties to litigation based on their subsequent conduct. For businesses, this decision offers crucial guidance on mitigating legal risks, reinforcing that the remedy of specific performance is not available in the absence of a complete and certain agreement between the parties on the clauses set out in the contract (consensus ad idem).
While this decision reinforces that term sheets which clearly state that they are non-binding, do not create binding obligations for investors, founders must understand that while the core economic terms might not be legally binding, they typically set the framework and expectations for the definitive agreements. Renegotiating these later can be extremely difficult and even damage relationships and hence attention must be paid to term sheets as well, despite them not being binding.
Please note: The information in this article is provided for general understanding and does not constitute legal advice. If you need specific advice or further details, please reach out to us directly at:
Ms. Vidyut Bedekar
Co-Founder & Practice Head, General Corporate, M&A, IP, Start-Ups
Email: vidyut@tlaindia.com
Ms. Trina Banerjee
Senior Associate, General Corporate and M&A
Email: trina@tlaindia.com
