[Arjim Jain and Shruti Asati are 5th Year B.A., LL.B. (Hons.) students at National Law University, Odisha]
In commercial transactions, especially those involving mergers, acquisitions, and venture capital funding, a “term sheet” plays a pivotal role in outlining the contours of the intended arrangement. While these documents often mark a significant milestone in negotiations, their legal enforceability remains a complex and fact-dependent issue. Typically, parties intend term sheets to be non-binding, reserving binding force only for select clauses such as confidentiality, exclusivity, and dispute resolution. However, when disputes arise and negotiations fail, the question of whether such a document creates enforceable obligations comes to the forefront.
The recent judgment of the Delhi High Court in Oravel Stays Pvt. Ltd. v. Zostel Hospitality Pvt. Ltd. revisits this contentious issue. The case, which arose from a failed acquisition attempt between the entities behind Oravel Stays Pvt. Ltd. (the petitioner, also known as OYO) and Zostel Hospitality Pvt. Ltd. (the respondent, known as ZO Rooms), saw conflicting interpretations by the arbitral tribunal and the court on the binding nature of the term sheet. The ruling underscores the primacy of contractual language over the conduct of the parties and offers critical insights into how Indian courts approach disputes arising from preliminary agreements.
Factual Background
The dispute stems from a Term Sheet dated 26 November 2015, entered into by OYO, ZO Rooms, and two investors—Tiger Global and Orios Venture Partners—for the proposed acquisition of Zostel’s assets, including intellectual property and key employees, by Oravel. The Term Sheet, while outlining the broad terms of the deal, explicitly stated that it was non-binding except for specific clauses like confidentiality and dispute resolution. Disagreements arose after Zostel claimed it had performed all its obligations under the Term Sheet, but Oravel failed to proceed with finalizing the acquisition, arguing that the Term Sheet was non-binding and negotiations had been terminated.
Zostel invoked arbitration under the Term Sheet on 25 January 2018, which Oravel opposed, denying the arbitrability of the dispute. Zostel’s interim relief petition under section 9 of the Arbitration and Conciliation Act, 1996, was dismissed by the District Court, Gurugram, for lack of jurisdiction, as the Term Sheet conferred jurisdiction on New Delhi courts. A subsequent petition under section 11 before the Delhi High Court was also dismissed, as the arbitration was categorized as international. Zostel then approached the Supreme Court, which constituted the Arbitral Tribunal on 19 September 2018 but left all preliminary objections raised by Oravel to be decided by the Tribunal itself.
Tribunal’s Finding
The Arbitral Tribunal’s reasoning was grounded in an assessment of both the express terms of the Term Sheet and the subsequent conduct of the parties. While the Term Sheet was labeled as non-binding except for certain specified clauses, the Tribunal found that the parties’ actions—such as Zostel’s transfer of employees and data, and OYO’s acceptance of those actions—demonstrated a mutual intention to be bound by the essential terms. The Tribunal concluded that the Term Sheet had ceased to be merely exploratory and had instead become a binding framework for the transaction.
However, it is important to note that the Tribunal did not grant immediate specific performance or direct relief such as share allotment. Instead, it held that Zostel was “entitled” to pursue specific performance in further proceedings. This distinction is crucial, as it highlights that the Tribunal recognized the existence of enforceable rights and obligations, but stopped short of ordering any concrete remedy at that stage.
Delhi High Court’s Judgement
The Delhi High Court, in a petition filed by OYO under section 34 of the Arbitration and Conciliation Act, 1996, seeking to challenge the arbitral award dated 06 March 2021, set aside the impugned award.
Analysis
In overturning the Arbitral Tribunal’s conclusion regarding the binding nature of the Term Sheet, the Court adopted a strict textual interpretation. It highlighted that the Term Sheet expressly stated its non-binding nature, reserving legal enforceability only for five specifically identified clauses—namely, those dealing with confidentiality, approvals, expenses, exclusivity, and dispute resolution. The Court emphasized that had the parties intended the entire Term Sheet to be binding, they would not have so clearly delimited its enforceability.
A key element of the Court’s reasoning was its reliance on the Supreme Court’s holding in Bank of India v. K. Mohandas, which cautioned against using the parties’ post-contractual conduct to override clear contractual language. The Court reinforced the principle that the intent of the parties must be discerned from the language used in the contract itself, rather than inferred from subsequent behaviour. It noted that the Arbitral Tribunal had not implied any term into the Term Sheet but had instead relied on conduct to “transform” a non-binding document into a binding one—a position the court found unsustainable in law.
Further strengthening its position, the court cited the Karnataka High Court’s decision in Azeem Infinite Dwelling v. Patel Engineering Ltd., which reiterated that a Term Sheet is only a preliminary expression of intent unless it explicitly creates binding obligations. In that case too, the absence of a final, definitive agreement and the lack of any consideration or performance under the Term Sheet were decisive in concluding that no binding contract had crystallized.
Although the Court acknowledged that a section 34 petition does not permit a merit-based review—especially in the context of international awards—it nonetheless expressed “serious reservations” about the arbitral finding that the Term Sheet was binding. However, the Court clarified that despite these concerns, it could not interfere with the Arbitral Tribunal’s reasoning on the binding nature of the Term Sheet, as doing so would require a merit-based review, which is impermissible under section 34. Consequently, that specific finding was not set aside. The award was ultimately quashed only on the ground that it conflicted with the “public policy of India,” thus maintaining the limited judicial role envisioned under the Act.
Comparative Perspective on Foreign Jurisdictions
The approach taken by the Delhi High Court emphasizing the primacy of clear contractual language over the parties’ conduct contrasts with the approach in some foreign jurisdictions. For example, in certain common law jurisdictions such as the United States and England, courts may be more willing to look beyond the label of a document and consider the parties’ conduct, partial performance, and reliance when determining whether a preliminary agreement is enforceable.
In the United States, cases such as Claim Recovery Group v. Markel held that even though the Term Sheet says the deal is “subject to” due diligence and formal agreements, this does not automatically mean it is not binding. Courts recognize that such language can still reflect an enforceable agreement. On the other hand, English courts generally treat term sheets as non-binding unless the parties have clearly expressed an intention to create legal relations and all material terms are agreed.
By contrast, the Delhi High Court’s strict textual approach in OYO v. Zostel reflects a more conservative interpretation, prioritizing the express terms of the agreement over extrinsic evidence of intent. This difference highlights the importance of carefully drafting term sheets and understanding the legal landscape in the relevant jurisdiction.
Conclusion
The judgement in OYO v. Zostel underscores that courts will give effect to the parties’ commercial understanding as expressed in the language of the agreement. If a term sheet clearly states that it is intended to be legally binding, the courts will enforce it—even if some details are left for later negotiation. From the buyer’s perspective, this creates significant risk, especially when critical information and control over due diligence lie with the seller. To avoid unintended obligations, buyers must ensure that term sheets explicitly state non-binding intent, particularly where reliance on further disclosures and formal agreements is essential. In commercial negotiations, clarity in documentation is not just preferred, it is decisive.
The Delhi High Court’s ruling reinforces the importance of clear contractual language in determining the enforceability of preliminary documents such as term sheets. While the Arbitral Tribunal had relied on post-contractual conduct to infer binding obligations, the Court clarified that such reasoning cannot override an explicit non-binding clause. This judgment illustrates both the procedural discipline of Indian courts in arbitral review and the substantive clarity needed when drafting term sheets.
– Arjim Jain & Shruti Asati