SC sends OYO-Zo Rooms dispute for arbitration


The Supreme Court has directed hospitality company OYO and one-time rival Zostel Hospitality towards arbitration to settle their dispute that followed a terminated acquisition. A three-judge Bench comprising outgoing Chief Justice of India Dipak Misra, Justice DY Chandrachud and Justice AM Khanwilkar has appointed former Chief Justice of India, Justice AM Ahmadi, as the sole arbitrator, whose decision shall be final and binding.

The companies have been locked in litigation, filing cases in various courts against each other, ever since OYO in October last year decided to call off a deal to buy Zostel’s Zo Rooms. That was two years after OYO’s largest shareholder, Japan’s Soft-Bank, announced the deal had been concluded. While OYO contested in the Supreme Court that the termsheet for the deal was non-binding, Zostel argued that the arbitration clause in the term-sheet was binding, and sought arbitration. Zostel, a portfolio company of US-based Tiger Global Management, had earlier also alleged data theft by OYO during due diligence.

“On a scan of the arbitration clause, there can be no doubt that a clause of arbitration exists between the parties in the term sheet. Whether the claims are arbitrable or not, is within the domain of the arbitration,” the Supreme Court stated in its order dated September 19. The arbitrator has 12 months to reach a conclusion.

“We welcome, respect and value the Hon’ble Supreme Court’s decision to appoint an arbitrator while giving OYO the opportunity to agitate the issue of arbitrability,” an OYO spokesperson said. Zostel did not immediately reply to emails seeking comments. As per the contested termsheet dated November 26, 2015, which ET has seen, preference shareholders of Zostel’s Zo Rooms were entitled to acquire equity shares in OYO subject to a maximum of 7% of its fully-diluted shareholding, including preferred stock and equity shares. Based on OYO’s present valuation of about $5 billion following multiple funding rounds since the dispute began, a 7% equity in OYO would amount to about $350 million. There is no guarantee that even if the arbitrator decides in favour of Zo Rooms, any award will be calculated on the basis of OYO’s current valuation, lawyers said.

The term-sheet also stated that any dispute arising from or relating to the term sheet that cannot be amicably resolved shall be referred to arbitration in New Delhi, in accordance with the Arbitration and Conciliation Act, 1996, adding that the decision of the arbitrator shall be final.

“The suit is under Section 11 of Arbitration Act, which is akin to administrative power of the court, so the court was well under the mandate of the law to not go into substantive matter of contract interpretation,” said Sidharrth Shankar, partner at law firm J Sagar Associates.

After OYO called of the deal a year ago, Zostel filed a petition in the Gurgaon District Court on February 2, 2018, alleging that OYO had acquired its data of employees, assets, hotel properties under the pretext of accelerating the process of acquisition and was refusing to pay the dues for the business acquired.

The court declined to pass an order on the petition on ground of jurisdiction, following which Zostel approached the high court and later the Supreme Court.

In October last year, OYO said that while it had in late 2015 explored a potential acquisition of Zo Rooms, “the non-binding term sheet for this deal already stands terminated in September 2016. Following this, we tried to identify potential value in their business but could not reach an outcome. We can now confirm that OYO has ended all discussions on the topic.” In response, a Zo Rooms spokesperson had said the company would take all steps to protect its interests, and accused Gurgaon-based OYO of acting in “bad faith.”