Arbitral Award In Conflict With “Public Policy Of India”: Delhi High Court In OYO V. Zostel Case
The Delhi High Court allowed OYO's Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 against an Arbitral Award.
The Delhi High Court has allowed the Petition filed by Oravel Stays Private Limited (OYO) against Zostel Hospitality Private Limited (Zostel) in an arbitration case.
The said Petition was filed under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), challenging an Arbitral Award passed by an Arbitral Tribunal comprising of a Sole Arbitrator.
A Single Bench of Justice Sachin Datta held, “It has been found in the award itself that there is no consensus ad idem in respect of the terms of the envisaged “definitive agreements”. Thus, the impugned award, in effect, permits/ sanctions proceedings for specific performance, of an agreement of which the material terms have not been agreed upon. Again, the same is contrary to ‘fundamental principles that constitute the basis for administration of justice and enforcement of law and contracts in India’. … the impugned award is in conflict with the “public policy of India” and is, consequently, liable to be set aside under Section 34(2)(b)(ii) of the A & C Act, 1996.”
The Bench observed that there can be no quarrel with the proposition that upholding the ‘entitlement’ of a party to seek specific performance notwithstanding absence of an agreement on material terms, is a violation of “fundamental principles that constitute the basis for administration of justice and enforcement of law and contracts in India”.
Senior Advocate Mukul Rohatgi represented the Petitioner while Senior Advocate Abhishek Malhotra represented the Respondent.
Factual Background
The Petitioner-OYO is engaged in providing technology and product solutions to the hospitality sector with focus on the budget hospitality segment, which includes hotels, homes, paying guests (PG) accommodations, co-living spaces, co-working spaces and college campuses. The Respondent-Zostel initially focused on providing hostel accommodations for backpackers and travellers and later launched its hotel aggregation business under the brand name “Zo Rooms” as well. The disputes between the parties stemmed from their competitive operations within the hospitality sector and escalated during subsequent negotiations regarding potential business acquisition. The entire dispute arose pursuant to a 2015 term sheet which was signed for the acquisition of the Zostel’s assets including intellectual property, software, and key employees, by OYO. After the execution of the Term Sheet, significant disputes surfaced between the parties. Zostel contended that it had fully complied with all obligations outlined in the Term Sheet, fulfilling its part of the agreement.
However, it was alleged that the OYO did not take the requisite steps to finalize the acquisition process. OYO’s stance was that the Term Sheet was a non-binding document, intended only as a preliminary framework, and that it had already been terminated. Being aggrieved, Zostel issued a notice under Section 21 A&C Act, formally invoking the arbitration clause contained in the term sheet. OYO refused to consent to the appointment of the Sole Arbitrator proposed by Zostel. Thereafter, Zostel filed a Petition under Section 9, seeking interim reliefs before the District Court, but the same was dismissed. Zostel’s Arbitration Petition before the High Court under Section 11 was also dismissed. It then approached the Supreme Court which issued an Order formally constituting Arbitral Tribunal. OYO challenged the jurisdiction of the Arbitral Tribunal. Ultimately, the Tribunal found merit in several claims made by Zostel, affirming that OYO had obligations stemming from the term sheet. Hence, the Petitioner was before the High Court.
Reasoning
The High Court in the above context of the case, noted, “… the conclusion in the impugned award to the effect that the term-sheet became a binding document by virtue of the conduct of the parties is somewhat tenuous. Even so, this Court is conscious of the fact that in these proceedings under Section 34 of the A&C Act, particularly, in the context of an international award, a merit based review is impermissible.”
The Court was of the view that having already held that the term sheet had become ‘binding’ on account of the conduct of the parties [despite the express stipulation to the contrary in the term sheet], it was open to the Arbitrator to give further directions for execution of definitive agreements (if permissible under law) and thereby grant specific performance, as sought by the Respondent/claimant.
“Instead, the learned Arbitrator sought to relegate the respondent/claimant to take “appropriate proceedings for specific performance and execution of definitive agreement”. … The preceding portion of the award itself finds that the arbitral tribunal had jurisdiction to adjudge upon all aspects of the term sheet and the relationship/obligations arising therefrom. It was held that the arbitration clause was wide enough to include adjudication of all the disputes/claims raised before the learned arbitrator”, it added.
The Court further remarked that it was open to the Arbitral Tribunal to either grant or refuse specific performance and considering that the Respondent has been held ‘entitled’ to specific performance, it was incumbent on the Tribunal itself to issue all consequential directions in this regard.
“Inexplicably however, the impugned award seeks to relegate the respondent/claimant to “appropriate proceedings for specific performance” for execution of definitive agreements. … The above conclusion of the learned arbitrator is quite incongruous. The same tantamounts to an omission to fully adjudicate the most central issue that arose before it, and virtually sets at nought the entire adjudication exercise before the arbitral tribunal”, it held.
The Court also said that the conclusion is irresistible that the impugned award omits to decide/adjudicate material issue/s which fell within the scope of the submission to arbitrate.
“As such, the impugned award is vulnerable to challenge on account of omission to decide material issue/s which fell within the submission to arbitrate. … even the findings in the impugned award to the effect that the respondent/claimant is “entitled” to specific performance is fraught with difficulties”, it added.
Conclusion
The Court enunciated that in the absence of any agreement between the parties on the basic aspects, it is inconceivable as to how the Respondent/Claimant could be held ‘entitled’ to specific performance.
“Having itself noticed that there was no consensus ad idem in respect of crucial aspects of the transaction, there was no occasion to hold that the respondent/ claimant is “entitled to specific performance”. It is trite that there can be no specific performance in a situation where there is no agreement between the parties as to the most material terms”, it reiterated.
The Court observed that the findings in the award is contrary to the basic tenets of Indian law of contract and specific performance.
Accordingly, the High Court allowed the Petition and set aside the arbitral award.
Cause Title- Oravel Stays Private Limited v. Zostel Hospitality Private Limited (Neutral Citation: 2025:DHC:3661)
Appearance:
Petitioner: Senior Advocate Mukul Rohatgi, Advocates Anuradha Dutt, Lynn Pereira, Suman Yadav, Haaris Fazili, Kunal Dutt, Raghav Dutt, Keshav Sehgal, Avinash Singh, Seema Mehta, and Prachi Pandey.
Respondent: Senior Advocate Abhishek Malhotra, Advocates Srishti Gupta, Kartikay Dutta, Raghav Shukla, Anukriti Trivedi, and Sonal Chhablani.
