Term Sheet Enforcement & Deal-Making Risks: Key Legal Insights From The OYO-Zostel Case

The enforceability of term sheets in Indian commercial transactions has emerged as a nuanced legal question with far-reaching industry ramifications. The recent judicial pronouncement in Oravel Stays Private Limited (OYO) v. Zostel Hospitality Private Limited by the Delhi High Court has provided renewed clarity concerning the boundaries of contractual intent at the pre-agreement stage. So, when does a “non-binding” term sheet metamorphose into a binding contract? More importantly, can the subsequent conduct of parties breathe life into a document expressly designed to remain dormant until definitive agreements are executed?

These questions strike at the heart of deal-making in modern India, where startups raise billions, mergers reshape industries, and investment negotiations oscillate between cautious courtship and aggressive consummation. Every day, entrepreneurs and investors execute term sheets, those preliminary blueprints that chart the contours of complex transactions while purportedly preserving the freedom to walk away. But do they truly preserve that freedom? Or are they unwittingly constructing contractual obligations, brick by brick, through their actions? This article critically analyses the principles surrounding the validity of term sheets, contextualises the latest ruling with historical case law, and examines broader implications for Indian business and legal practice.

The Tale of Two Hospitality Titans

On November 26, 2015, OYO (then Oravel Stays Private Limited) and Zostel Hospitality Private Limited, along with Zostel's shareholders, including Tiger Global and Orios Venture Partners, executed a term sheet for OYO's proposed acquisition of Zostel's assets intellectual property, software, key employees, and the Zostel brand itself. The document was unambiguous in its preamble: it was “non-binding” and “intended solely as a summary of the current terms,” with parties expressly stating they “do not intend to be bound until they enter into Definitive Agreements.”

Only five specific clauses were designated as binding: confidentiality, approvals, expenses, exclusivity, and governing law and arbitration. Everything else, the acquisition mechanics, share issuance, post-closing obligations, the USD 1 million payout to founders, remained subject to execution of definitive agreements that would capture “the entire understanding arrived at amongst them.”

What followed was a textbook illustration of how commercial relationships can spiral into legal quagmires. Zostel claimed it fulfilled all obligations under the term sheet, transferring employees, properties, customer data, and confidential business information to OYO. OYO conducted extensive due diligence, gaining access to Zostel's most sensitive commercial secrets. Yet the definitive agreements were never executed. When the deal collapsed, Zostel invoked arbitration, demanding specific performance of the term sheet's provisions.

The Arbitral Tribunal issued a ruling: notwithstanding the express non-binding language in the term sheet, it had acquired binding effect through the parties' subsequent conduct. By acting upon its terms transferring assets, sharing confidential information, coordinating business operations—the parties had, according to the Tribunal, "waived" the non-binding nature of the document and created enforceable obligations. Zostel was entitled to specific performance, the Tribunal ruled, directing further proceedings to execute the contemplated definitive agreements.

OYO challenged this award before the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996, setting the stage for a landmark pronouncement on the validity of term sheets in India.

Key Legal Issues Before the Court

• Whether the term sheet, despite its non-binding language, has become enforceable due to the conduct of the parties.
• Discuss the arbitral tribunal's jurisdiction on claims raised by non-signatory parties.
• Held Zostel entitled to seek specific performance of the term sheet's terms and directed the execution of definitive agreements.

The Delhi High Court, after reviewing arbitral tribunal findings and the arbitral award, concluded that the award suffered from material omissions and was contrary to the public policy of India. The Court held that, despite claims of binding force by conduct, the absence of consensus ad idem on essential terms meant that no enforceable contract existed for specific performance.

Analysis of the Judgement

The Delhi High Court held that the arbitral clause extended to all disputes “arising from or relating to” the term sheet, with a non-technical limitation to only “binding” clauses. The Court upheld the Tribunal's jurisdiction to decide the dispute, even as it reaffirmed that the enforceability of the underlying contract remained for adjudication.

The Court also scrutinised the language and intent of the term sheet. Citing Supreme Court principles from Mayawanti vs Kaushalya Devi, the court held that consensus ad idem is essential for a contract to be specifically enforced; uncertainty or open points of negotiation negate this possibility. The Court found that critical commercial terms were not agreed upon, and the term sheet explicitly made the deal contingent upon execution of definitive agreements. Conduct alone could not override clear documentary intent. The decision thereby set aside the arbitral award, finding it vulnerable for fundamental failure to resolve the question of consensus and binding force.

The Delhi High Court's treatment of “public policy” as a ground for setting aside the arbitral award is pivotal to the judgment. After the 2015 amendments to the Arbitration and Conciliation Act, 1996, the courts can only intervene on public policy grounds in a situation, specifically, if an arbitral award violates fundamental legal principles, natural justice or Indian law.

In the OYO vs Zostel, the Court took a stringent view that the arbitral awards suffered from grave defects. However, the tribunal had entitled Zostel to specific performance, which is effect, a right to obtain shares in OYO, without finding that there was any clear consensus ad idem, that is, no concluded or binding agreement had ever arisen between the parties on key terms. The arbitrator's omission to decide crucial legal issues and its contradictory orders shocked the judicial conscience.

This led the court to conclude that enforcing such an award would undermine the basic fabric of contract law and violate statutory requirements, thereby falling squarely within the narrowed ground of “public policy”. In short, the award purported to grant Zostel a significant corporate right against OYO without the foundation of a concluded, enforceable agreement; it crossed the threshold into fundamental legal error. The court held that such an award could not be allowed to stand under the Arbitration and Conciliation Act, 1996.

Historical Context and Precedents

In Mayawanti vs Kaushalya Devi¹, the Supreme Court decision is fundamental in Indian Contract Law concerning specific performance. The Court emphasised that specific performance, a remedy unique to equitable relief, requires a clear and certain contract with all essential terms agreed upon by the parties' consensus ad idem. If significant terms remain open or undecided, courts refuse to grant specific performance. This principle was crucial in OYO vs Zostel because the term sheet explicitly stated it was non-binding, except for certain clauses, and key commercial terms were not finalised. The Delhi High Court relied on Mayawanti vs Kaushalya Devi to conclude that without a meeting of minds on essential terms, specific performance was not appropriate.

In Indian Oil Corporation Limited vs Amritsar Gas Service², the Supreme Court ruled that contracts which are “determinable” or terminable at will by one party are not suited for specific performance, and damages should be the remedy instead. In OYO vs Zostel, the court applied his to hold that a preliminary agreement or term sheet with non-binding language and conditional terms constitutes a determinable contract, thus disallowing specific performance claims. However, the term sheet in OYO vs Zostel was similarly held to be a determinable contract due to its non-binding nature and contingent clauses.

The Broader Implications: Patterns, Precedents, and Practical Wisdom

1. Primacy of Express Terms Over Conduct: The Court's categorical rejection of conduct-based reasoning in the presence of clear non-binding language underscores a strong preference for textual interpretation. This approach aligns with the Supreme Court's guidance in Bank of India v. K. Mohandas, which emphasises that contracts must be construed based on their written terms rather than the parties' subsequent behaviour.
2. Centrality of Consensus ad Idem for Specific Performance: The Court held that specific performance cannot be granted or even an entitlement to it recognised without mutual agreement on all essential terms. This reaffirms foundational principles of contract law and sets a high threshold for enforcing preliminary agreements. Parties cannot bootstrap themselves into specific performance merely by partial performance under a term sheet; they must first achieve consensus on all material terms in a definitive agreement.
3. Non-Adjudication of Material Issues as a Public Policy Ground: The Court found that the Tribunal's failure to fully adjudicate the prayer for specific performance, by relegating parties to further proceedings, constituted a violation of public policy. This establishes that arbitral awards must comprehensively resolve disputes rather than create new rounds of litigation. It also signals that courts will scrutinise awards closely to ensure they decisively address the issues they purport to resolve.
4. Renewed Vitality of the Determinable Contracts Doctrine: Although the Court noted that this issue was not fully addressed by the Tribunal, its emphasis underscores that determinability remains a potent defence against specific performance claims under Section 14(d) of the Specific Relief Act. Contracts terminable at will, even if wrongfully terminated, generally cannot be specifically enforced. This principle applies with particular force to term sheets that expressly allow unilateral termination before definitive agreements are executed.
5. Plan for Termination Scenarios. Include clear provisions addressing what happens if negotiations break down: return of confidential information, destruction of data, standstill obligations, break-up fees if appropriate. This protects both parties' legitimate interests while preserving negotiating freedom.
6. Recognising Industry Practices: In venture capital and private equity, certain term sheet provisions, such as exclusivity, expense reimbursement, and confidentiality, are routinely treated as binding. Courts may increasingly consider these trade usages when interpreting ambiguous clauses, reinforcing commercial certainty and aligning legal interpretation with market realities.
7. Technology and Contractual Innovation: The rise of blockchain-based smart contracts and digital execution platforms introduces new dimensions to term sheet enforceability. Automated triggers and digital signatures blur traditional boundaries between “binding” and “non-binding.” As technology integrates deeper into transactional processes, courts and practitioners will need to develop frameworks that harmonise these innovations with established principles of contract law.

Closing Thoughts

In an age of speed, where startup valuations soar and fall with dizzying rapidity, where billion-dollar mergers are negotiated across time zones and continents, and where competitive pressures demand swift preliminary commitments, the humble term sheet has become indispensable. Yet its very utility, providing a framework for negotiation while preserving flexibility, creates inherent tension with legal certainty and enforceability.

The Delhi High Court's OYO-Zostel judgment resolves much of this tension in favour of contractual freedom and textual clarity. Parties cannot bootstrap themselves into binding obligations through conduct alone when they have expressly disclaimed any intention to be bound. Specific performance requires a complete, certain agreement with consensus on all essential terms.

This case crystallises foundational doctrines of Indian contract law, certainty, consensus ad idem and judicial restraint in elevating preliminary documents to enforceable status. It serves as a cautionary tale for startups, investors and established companies engaging in mergers and acquisitions; absolute clarity in documentation and agreement on core terms is indispensable. The judgment also echoes the evolution of Indian jurisprudence towards arbitration-friendly, yet contractually rigorous, dispute resolution, a critical balance as India's commercial landscape grows in scale and complexity. Perhaps the deepest lesson of the OYO-Zostel saga is this: in the dance of deal-making, clarity is kindness. Every ambiguity, every assumption left unexpressed, every detail deferred for later becomes a potential landmine. When billions of rupees and years of business strategy hang in the balance, precision is not optional; it is the cornerstone of trust and enforceability.

Footnotes

1. (1990) 3 SCC 1

2. (1991)1 SCC 533

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