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Understanding The Legal Weight Of Your Term Sheet

In the realm of commercial transactions, a term sheet often functions as a crucial stepping stone – establishing the foundation of a proposed deal. As a roadmap for future definitive agreements, a term sheet captures the parties' preliminary intentions and commercial understanding. That said, when a term sheet has a blend of binding and non-binding clauses, it treads a legally ambiguous path. The enforceability of such documents has long been a contentious issue, raising questions about when a term sheet crosses the line from being a mere expression of intent to becoming a legally binding contract.

This uncertainty came to a head in the recent high-profile dispute between OYO (Oravel Stays Private Limited) and Zostel (Zostel Hospitality Private Limited). Here, while an arbitral tribunal initially ruled in the favour of Zostel enforcing the rights and obligations outlined in a term sheet signed in 2015, the Delhi High Court (DHC) set aside the arbitration award, underscoring the non-binding nature of the document.

The Supreme Court of India (SCI) very recently refused to entertain Zostel’s appeal against the DHC’s judgement on the ground that Zostel should have filed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, as opposed to moving the SCI with a special leave petition under Article 136 of the Constitution of India. Pursuant to SCI’s observation, reportedly, Zostel has withdrawn its petition.

This Article delves into the dispute, the key findings of the arbitral tribunal and the DHC and examines the legal weight that term sheets can (or cannot) carry.

OYO – ZOSTEL DISPUTE

Background

Back in 2015, OYO and Zostel, signed a non‑binding term sheet outlining a potential acquisition where Zostel was to transfer tech assets, IP, employees, and hotels to OYO, in exchange for a 7% stake in OYO. However, it explicitly required execution of ‘final and definitive agreements’ for binding effect - only provisions related to confidentiality, exclusivity, governing law etc. were enforceable.

Although some progress was made towards the proposed transaction (such as conducting due diligence and as per Zostel’s claim, transfer of business and personnel to OYO), the definitive agreements contemplated in the term sheet were never signed. This led to Zostel initiating arbitration, claiming specific performance of the term sheet and compensation for OYO’s failure to close the deal.

Arbitration Award

The arbitral tribunal found that:

  • The term sheet, although styled as ‘non-binding’, created enforceable obligations based on the conduct of the parties.

  • Zostel had fulfilled its obligations, including the transfer of assets and employees and OYO’s failure to consummate the transaction amounted to a breach.

    • The arbitral tribunal held that OYO was liable to issue 7% equity to Zostel shareholders and pay USD 1 million to the founders as per the term sheet. The tribunal rejected OYO’s argument that the absence of executed definitive agreements rendered the term sheet unenforceable.

    DHC’s Intervention

    OYO challenged the above-mentioned arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The DHC in Oravel Stays Pvt. Ltd. v. Zostel Hospitality Pvt. Ltd.[1] (OYO Zostel Judgement) set aside the award making crucial observations on the legal enforceability of term sheets and observed that:

    “… A document that clearly states it is not binding and requires execution of further definitive agreements for its terms to become enforceable, cannot, by conduct alone, be elevated to a legally binding contract …”

    A few key findings from the OYO Zostel Judgement are set out below:

  • The term sheet expressly stated that it was non-binding except for certain specified clauses. Clause 7 particularly made the closing of the transaction contingent upon the execution of definitive agreements.

  • There was no evidence that the parties had reached a final and concluded agreement on the essential terms of the deal and therefore, there was no consensus ad idem, a necessary element for the formation of a binding contract. Specific performance can only be granted for enforceable contracts, and not for preliminary documents like term sheets unless there is clear intention and consensus on essential terms. Granting specific performance in the absence of a complete agreement between the parties is contrary to the basic tenets of Indian law of contract and specific performance.

  • While Zostel had transferred employees and assets, the DHC ruled that these acts, at best, reflected the parties’ preliminary intentions and could not override the explicit non-binding nature of the document – the DHC observed that: “… Even if some steps were taken by the respondent towards performance, these were in furtherance of negotiations and cannot be construed as evidence of a concluded contract …”

  • Citing Supreme Court of India’s judgement in Bank of India v. K. Mohandas[2], the DHC emphasized that the true construction of a contract depends on the words used, not subsequent conduct.

    • Therefore, this comes as a vital lesson in transactional practice: intention matters, but so does the underlying documents. If the document explicitly states it is non-binding, courts may not interpret it otherwise, regardless of subsequent actions.

    KEY TAKEAWAYS

  • Drafting precision and clarity is paramount: As is the case with any legal document, it is always advisable to use precise and unambiguous language and clearly demarcate which parts of a term sheet are binding and which are not. Parties should avoid ambiguity, especially when large financial obligations are involved. While the conduct of parties matters, it cannot easily override express and unambiguous terms. The OYO Zostel Judgment reinforces the idea that if parties want an agreement to be non-binding, they must state it clearly and act consistently with that intention.

  • Execute your definitive agreements before performing: As is evident from DHC’s findings in the OYO Zostel Judgement, even if parties begin to act upon a term sheet, failure to execute definitive agreements can nullify enforceability of such term sheet. The remedy of specific performance may be available only when there is a valid and enforceable contract with a clear meeting of minds on all essential terms.

    • CONCLUSION

    The law does not look kindly on casual commitments in high stakes deals. The OYO-Zostel episode reaffirms a crucial lesson for dealmakers: a term sheet is more than a memo - it can be the linchpin of enforceable legal commitments. It serves as a cautionary tale on the limits of relying on term sheets. While they are essential tools in deal-making, term sheets are not substitutes for final contracts. While we await SCI’s views on this, the DHC’s judgment reaffirms that in commercial transactions, intent must be reflected in binding documentation, and that conduct alone may not suffice.

    In the world of high-stakes transactions, what is agreed in written truly matters.

    Disclaimer: The views and opinions expressed in this Article are those of the authors. This Article is for informational purposes only and does not constitute legal advice. Readers should consult their legal advisors regarding their specific facts and situation.

    Shivani (Senior Associate, General Corporate and Transactions)

    Natasha Tuli (Counsel, General Corporate and Transactions)

    [1] 2025 SCC OnLine Del 3377

    [2] (2009) 5 SCC 313

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