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Oyo v. Zo Rooms : case analysis

September 26, 2021
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This article is written by Sharad Yadav from the Institute of Law, Nirma University. This article will help you understand the dispute between these two companies, which leads the case before the Arbitration Tribunal.

Table of Contents

Introduction

The issues between the two companies date back to 2015 when Zo Rooms, the hotel accommodation chain owned by Zostel Hospitality, was shut down after the merger talks between the two companies failed. After having a long conflict between the two companies, the Supreme Court-appointed the former CJI Justice A.H. Ahmadi as an arbitrator for resolving the dispute between two companies.

Facts of the case 

The dispute between the Oyo and Zo started back in 2015 where SoftBank-backed Oyo had taken the Tiger Global-backed Zo Rooms over the alleged theft of its copyright material, but the Delhi High Court on 21 April 2015 issued a stay order against the preceding of Zo Rooms. Despite this legal battle, in late 2015, Oyo was reported to have explored a potential acquisition of Zo Rooms, but after two years of speculation, the merger fell flat in the year 2018. Soon after the merge talk failed, Oyo filed a complaint against Zostel Hospitality for continuous inconvenience and harassment by the Zostel founder on 16 January 2018, related to criminal breach of trust, cheating, and misrepresentation of data. Zostel, who filed the separate petition on 2 February 2018, stated that Oyo had acquired its assets, data of employees, hotel properties under the disguise of accelerating the acquisition process and now completely refused to pay the dues for the business acquisition.

Oyo, in the statement, stated that “the allegation related to a long expired and non-binding term sheet, is completely false to suggest that Oyo benefitted from the talk since business has been faltering at that stage. Also, there was no response to a list of issues identified during our diligence process, including significant liabilities and unpaid dues as well as undisclosed contingent liabilities. Oyo also stated that it has been harassed by Zostel and its directors and claimed that Zostel was too intimidating to submit their unreasonable demands.”

After having long months of legal battle, finally, the Supreme Court, by the order dated 19 September 2018, accepted the arbitration petition by Zostel and appointed former Chief Justice of India, Justice A M Ahmadi as a sole arbitrator. Oyo was represented by prominent lawyers like Dr Abhishek Manu Singhvi, Salman Khurshid, among others, while Zo Rooms was represented by Abhishek Malhotra, a Managing Partner at TMT Law Practice.

Issues raised before the Arbitral Tribunal

Whether the Arbitral Tribunal has the jurisdiction to entertain claims of Claimant no. 3 to 17?

Argument by the Claimant

The council for the claimants submitted that it is well-settled law that non-signatories to the arbitration agreement can be parties to the arbitration. Arbitration clauses in the term sheet have a wide amplitude and include the claims of claimant nos 3 to 1. They also relied upon clause 16 of the term sheet and the order dated 19.08.2019 passed by the Tribunal dismissing the respondent’s application under Section 16 of the Arbitration And Conciliation Act, 1996 in which claimant no. 3-17 were allowed to participate in the proceedings.

Argument by the Respondent

Counsel for the respondent submitted that a non-signatory third party could not be made a  party to an arbitration proceeding. The judgment passed in Chloro Controls and Cheran Properties where the SC held that an arbitral award can be enforced against a non-signatory, does not apply to the fact and circumstances of the present matter. The power to implement third parties exclusively lies within the courts and not with the Arbitral Tribunal.

Award by Tribunal 

After listening to the arguments by both parties, the Tribunal said that the decision in Praveen Enterprises, 2011 where the Court ruled that a counterclaim is an independent proceeding and cannot be dismissed merely for the reason that the arbitration proceedings are dismissed by the Arbitrator is no assistance as the said judgment dealt with the requirement of notice under Section 21 of The Arbitration And Conciliation Act, 1996. The said judgment would not be applicable to the present case as the facts are not the same. Hence in view of the law which was laid down in the Alupro Building Systems Pvt. Ltd, 2017 and in view of the mandatory requirement of Section 21 of the Act has not been complied by the claimant no. 3 to 1, and the Tribunals held that, it has no jurisdiction to entertain the claims of claimant no. 3-17.

Whether claimant No. 2 and 3 have waived their right to raise any claims, and hence their claims are not maintainable?

Arguments by the claimant

It was submitted by the claimant’s counsel that neither claimant no.2 nor claimant no.3 had waived off their right to raise the claim before this Tribunal. It is stated by the counsel that claimant no.2 is not only the signatory of the term sheet but also a beneficiary to the transaction The personal involvement of claimant no.3 in the negotiations and discussions  related to the execution of the term sheet showed that claimant no.3 had not waived it’s right to raise a claim before the Tribunal.

Arguments by the respondent

It was submitted by the respondent’s counsel that the arbitration petition before the Supreme Court was preferred by only claimant no.1, and claimant no.2 was only a proforma respondent and did not enter an appearance before the Supreme Court. The notice invoking arbitration dated 25.01.2018 was issued only to claimant no.1 and not any other claimants. therefore the Claims of claimant 2 and 3 cannot be maintained.

Award by Tribunal

Tribunal, after going through the arguments by both parties, stated that it does not consider it fit to entertain the claims of claimant no.2 and claimant no.3 are signatory to a term sheet but not served a notice under Section 21 to the respondent. Hence, the claims of claimant no.2 and claimant no.3 were not maintainable. 

Whether the term sheet dated 26.11.2015 is a non-binding or a binding, valid and an enforceable agreement as alleged by the claimants?

The nature of the term sheet dated 26.11.2015 remains one of the main focal points of the disputes that have arisen in the present matter.

Arguments by the Claimants

It was claimed by the claimant that the term sheet is binding, while the respondent has vehemently argued that it is non-binding.

Mr Malhotra, the learned counsel for the claimants’ argued before the Tribunal that the term sheet was a complete contract and contained the respondent offered to acquire the Zo Rooms business. The conduct of the parties, subsequent to the execution of the term sheet creates a binding contractual obligation on the parties, which applies to the signatories as well as non-signatories. Parties, by way of conduct, waived the non-binding preamble of the term sheet and created a binding and enforceable contract.

Some of the instances which are pointed by Zo Rooms to show term sheets were binding are given below:

Arguments by respondent

It was argued by the respondent that the term sheet does not constitute any binding agreement as claimed by Zo Rooms. A term sheet is an agreement that is not recognized by the law. The term sheet was signed only for the purpose of further discussions, and it was terminated vide correspondence dated 17.09.2016 and 19.09.2016.

On the argument of the non-binding nature of the term sheet waived by the parties. It was stated by the Oyo counsel that claimants (Zo Rooms) were not given any explanations, which shows that the non-binding nature was waived by the parties and converted the term sheet into a binding contract. Respondents stated that the cases Reveille Independent LLC v. Anotech International (UK) Ltd. and RTS Flexible Systems Ltd. v. Molkerei Alois Muller Gmbh & Co. Videocon Telecommunication. v. Bharat Sanchar. could not be applied in the present case as the cases do not apply to the facts of the present case.

Award by the Tribunal

After carefully examining the case, the Tribunal stated that the term sheet demanded claimant no.1 to fulfil many conditions as a closing obligation, and the term sheet was not as a mere exploratory document. It was duly executed by claimant no.1 and the respondent. A complete reading of the term sheet does not support the version taken by the respondent.

Whether there was any consensus ad idem between the parties on the draft definitive agreements stipulated under clause 7 of the term sheet, which is dated 26.11.2015?

Arguments by claimants

It was argued by the claimant’s council that consensus ad idem had been achieved in respect of the definitive documents. After the instruction and consensus ad idem, the claimants brought the stamp paper for the execution of the definitive documents. They relied on the email dated 31.03.2016, which was sent by Ms. Nikita (Counsel of the respondent) and an email by Mr. Vinay Thakur (One of the respondent’s officials), which shows that they were giving the details of the stamp paper which was to be brought on the same day. 

The only reason due to which the definitive documents were not executed was because of an unsupportive attitude and stand which was taken by the Venture Nursery. The counsel had placed the reliance upon the testimony of claimant’s witness Mr. Abhishek Bhutra and Mr. Dharamveer Chauhan along with the email sent by Mr. Gautam Mago sequoia capital dated 26.01.2016). It is shown by the claimants that the email dated 02.03.2016 exchange between the counsel for Respondent and Claimant had committed to concluding the transaction as per the agreement.

Arguments by the respondent

Oyo’s counsel argued that the parties had no intention to be bound in the absence of finalization of the definitive documents. It is not the claimant’s case that there is a waiver of this requirement. The council also argued that claimants’ witnesses admitted that signing would be essential to show confirmation of acceptance of the terms of definitive agreements, and the claimants can not claim that the definitive documents were entered into orally.

Additional documents and data were given to process the documents for a demerger instead of transferring the business. It was contended that the claimant’s stand seems contradictory as on the one hand, they stated consensus of definitive documents, while on the other hand referred to a new understanding in the statement of claim.

Earlier drafts of definitive documents were no longer relevant in the case as new documents were required to be agreed upon in terms of the new understanding. Hence, the argument which said that consensus was arrived at by the claimants and the respondent by March 2016 can not be believed. The council tried to bring attention to the fact that the draft placed on the records by the claimant showed that Zo Hostels business was also to be acquired, but the claimant relied on the email dated 10.02.2016 which clearly stated that Zo hostels business was not to be transferred. Contradictions on this show that drafts could not have been final.

The email dated 08.04.2016 and 10.04.2016 were relied upon to show that there was no consensus between the claimant (they wanted to carry out changes in the drafts) and the respondent. Even if there was any consensus on the drafts of the definitive agreements, the claimants have by their own conduct given up the transaction as contemplated under the draft definitive agreements. The version of the definitive agreement in the statement of claims had not been identified or produced with the statement of claims.

The definitive document that the claimant relied upon showed that there were a total of 10 agreements to which there were 33 parties who were signatories to at least 1 of the said agreement including but not limited to all shareholders of the claimant no.1 (shareholders of the respondent and the key employees of claimant no.1. This clearly shows that the claimant themselves, one of the signatories, had objections to the documents. Hence, it is incomprehensible how it can claim that the documents had been agreed upon between them.

Award by the Tribunal

The Tribunal observed that the document placed on the record showed that the parties were inclined to close the deal. It is observed that the revision of the definitive document and their finalization were significantly affected by the events pertaining to the issue raised by the Venture Nursery. It was essential that the definitive agreements be amended to include the changes as proposed by the Venture Nursery, but such a document never came to be finalized by the parties. Therefore, the Tribunal held that there could not have been a complete consensus ad idem on the draft definitive agreements.

Whether as stated by the claimants, they are ready and willing to perform their obligation under the term sheet dated 26.11.2015 and to execute the draft definitive agreements as contemplated under the term sheet

Arguments by the Claimants

It was submitted by the counsel for the claimants that they were ready and willing to perform their obligation and execute the draft definitive agreements contemplated under the term sheet. He stated that the claimant performed all closing obligations under the term sheet independent of action performance by the respondent. The obligation which remains unfulfilled is the execution of the finalized definitive document and the withdrawal of litigation that was pending by both parties.

It was after the transfer of the claimant’s business (a hotel), and employees to the respondent, that the claimants were informed about the issues raised by the Nursery (respondent minority shareholder).

The claimant relied upon the mail, which was dated 08.04.2016 and 10.04.2016, which was addressed by claimant no.8 to the respondent, asking the exact dates of execution of the final definitive document. They cited the case of Ramesh Chandra Chandiok v. Chunilal Sabharwal,1971 for responding to the question of readiness and willingness as one of construction of facts and details or particular of a case from which the readiness and willingness can be inferred. It was shown by the testimony of the claimant’s witnesses to show that the claimant was ready and willing to close the transaction; it was the respondent who was not willing to perform their obligation even after gaining the benefit of the bargain.

Claimants are the following instances in support of the argument that they were willing to perform their obligation:

All the obligations under the term sheet were performed except the withdrawal of litigation and execution of the finalized definitive documents, which remained due to the respondent’s lack of willingness to perform its obligations.

Arguments by the respondent

The counsel for the respondent stated that the claimants had failed to prove unconditional readiness and willingness at all times in order to fulfil their obligation under the term sheet and the definitive agreements. 

Counsel for the Respondent submitted the following things:

Award by the Tribunal

The Tribunal, after going through the arguments by both the parties, held the issue in favour of the claimant as the claimant was ready to perform their obligations under the term sheet and execute the draft definitive documents.

Whether the claimants are entitled to specific performance of the term sheet by directing the respondent to issue 7% of the present share in favour of claimant no.2 to 17 pro-rated to their respective shareholding of claimant no.1?

It was argued by the claimant that they were entitled to the specific performance of the term sheet dated 26.11.2015. And the respondent denied the claimant’s submission. The parties reiterated the arguments advanced earlier in support of the submission.

Award by the Tribunal

The Tribunal previously, on one of the issues, held that parties could not arrive at consensus ad idem in respect of the definitive document. The term sheet was a binding document, and the claimant did everything to complete their obligation under the same. The claimant can not be held responsible for the acts and omissions of the respondent.

This Tribunal held that claimant no.1 was entitled to claim for the relief of allotment of shares. The definitive documents could not be executed because of the problems created by the shareholder of the respondent (Venture Nursery). The respondent had committed a breach of obligations under the term sheet, and the claimant did everything within their control to complete their obligations under the term sheet. 

Hence, the claimant could not be held responsible for the acts and omissions of the respondent. Therefore, the claimant is entitled to specific performance of the respondent’s obligation. However, as definitive agreements were yet to be executed, the Tribunal held that the claimant was entitled to take appropriate proceedings for specific performance.

Whether the claimants are able to prove loss of goodwill and are entitled to any kind of damage to the extent of 17 million USD?

Arguments by the claimants

It was submitted by the counsel of claimant’s that they were entitled to damages on account of loss of goodwill, reputation and inconvenience caused to them. Under Section 21 of the Specific Relief Act, 1963, compensatory damages can be awarded to the party. The non-performance of obligations by the respondent and lack of payment for consideration  of the transaction has adversely affected the reputation and inconvenience caused to the claimant. 

At the time of the transaction, claimant no. 1 was the 2nd largest player in budget hotels. Within one year of its buildup, it grew up to 4000 rooms with a credible customer rating. The respondent failed to honour its obligation and committed a breach of contract due to which the goodwill of claimant no. 1 was severely impacted.

Arguments by the respondent

It was argued by the respondent that the claimant was not entitled to any kind of damages on account of loss of goodwill, reputation or inconvenience caused. The evidence affidavits show that there was no basis for such a claim.

The claimant failed to place even a single document on record, which showed that there was a loss of goodwill. In the view of the law laid down in the case of Ghaziabad Development Authority v. Union of India,(2000) the said relief was liable to be rejected on the ground of lack of evidence.

Award by the Tribunal

The Tribunal ruled out that the claimant is entitled to specific performance. The Tribunal did not deem fit to grant relief in respect of loss of goodwill to the claimant. The same was dependent on the outcome of the proceeding for specific performance.

Whether the cost will be borne by the claimant or respondent, and if so, to what amount?

Arguments by the claimants

It was submitted by the claimant’s counsel that the claimant had undergone a huge loss in business and goodwill. The respondent had benefited by acquiring the 1st claimant’s hotel business and had committed a breach of contract. 

Therefore here, the respondent is a defaulting party, and it is a settled law that the defaulting party will bear the costs of the dispute under adjudication. The claimants had sought the entire cost of the proceedings along with the cost of payment of the stamp duty for procuring the stamp paper.

Arguments by the respondent

The respondent denied that the claimant was entitled to any kind of costs. It was argued by the respondent’s counsel that the entire proceeding ought to be awarded in favour of the respondent in addition to the costs for the application under Section 27 of the Arbitration and Conciliation Act,1996 already granted in favour of the respondent via order dated 22.06.2020.

Award by the Tribunal

After hearing the counsel of both the parties, the Tribunal gave the ruling in favour of the Claimant.

Statement of Zo Rooms

After the Arbitration Tribunal’s announcement of the judgment, Paavan Nanda, who is the co-founder of Zo Rooms, stated that he won the three-year-long legal battle against Oravel Stays, which owns and operates the hotel chain Oyo with regard to the breach of a binding agreement. Beyond the monetary compensation, it was the fight for our rights and reputation”.He stated that Oyo had breached the term sheet signed on 26 November 2015 by not executing any deal. Zo Rooms completed its obligation under the agreement and transferred the business but Oyo failed to transfer the 7% of share to Zo Rooms which led to the recently concluded Arbitration proceeding. He also said that “we are extremely relieved with the judgment that the Tribunal has pronounced after evaluating all the evidence produced by us over the last three years”.

Rejection of claims by Oyo

Oyo rejected the claims by Zo Rooms that the Arbitration Tribunal had granted any kind of relief in terms of receiving ownership by Oyo. According to the last estimate Oyo was valued at $9 billion when it raised Rs 54 Cr. from Hindustan Media Ventures. Oyo also stated in the statement that the final award purports to provide Zostel with a right to initiate appropriate proceedings and sought execution of the definitive agreement while there was no specific remedy that was granted except their prayer for a cost which Oyo vehemently opposed in all avenues available under the law of the land. The company stated that it is finding legal remedies to challenge the tribunal ruling as it treated a non-binding document such as a term sheet as a binding document.

Conclusion

The Arbitration Tribunal, headed by sole Arbitral the former CJI Justice A.M Ahmadi, ruled in favour of Zo Rooms. Now it’s going to be interesting to see what will happen next. As Oyo, in its statement, stated that they are finding legal remedies to challenge the Tribunal order. It’s going to be a huge loss for Oyo if its 7% of shares get transferred to  Zo Rooms.

References


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