INTRODUCTION

Term sheets act as a roadmap to guide negotiations between parties and drafting of definitive agreements by outlining key commercial terms agreed upon by the parties. Parties use term sheets to establish a basic transaction structure, later formalised through definitive agreements. At this stage, it typically constitutes a non-binding agreement to agree. However, certain provisions—such as confidentiality, exclusivity, governing law, and dispute resolution —may be made binding to safeguard interests of the parties. 

The dispute between Oravel Stays Private Limited (“OYO”) and Zostel Hospitality Private Limited (“Zostel”) has been pivotal in examining the enforceability of term sheets under Indian law. This note discusses the legal interpretation of term sheet enforceability in India, in light of the recent Delhi High Court judgment in Oravel Stays Private Limited v. Zostel Hospitality Private Limited.¹

OYO v. ZOSTEL

Background

In 2015, OYO and Zostel signed a term sheet for OYO to acquire certain identified Zostel assets. It expressly stated it was non-binding, except for clauses on “Confidentiality,” “Approvals,” “Expenses,” “Exclusivity,” and “Governing Law and Arbitration,” and was subject to the execution of the definitive agreements. A dispute arose between the parties concerning the definitive agreements and the transaction did not materialise. Zostel claimed it had fulfilled its obligations under the term sheet and that OYO was bound to perform its reciprocal obligations, while OYO argued that the term sheet was non-binding. In 2018, the parties referred their dispute to arbitration to determine the enforceability of the term sheet.

Arbitral award and subsequent 2022 judgment

In its arbitral award, the Arbitral Tribunal (“Tribunal”) held that the term sheet executed between the parties was binding in nature. The Tribunal emphasised that the term sheet must be construed in its entirety, rather than relying solely on the language of the preamble of the term sheet that it was non-binding. It rejected the argument that the term sheet was merely indicative or explanatory, citing the following key considerations:

1. The term sheet outlined specific conditions precedent to be fulfilled prior to the closing of the transaction;
2. The language indicated that the execution of definitive agreements was not intended to be independent of the term sheet; and
3. Zostel had taken concrete steps to fulfill its obligations under the term sheet and had communicated these steps to OYO.

Further, the Tribunal found that the conduct of the parties demonstrated a clear mutual intent to proceed with the transaction. Accordingly, the Tribunal held that Zostel was entitled to seek specific performance of OYO’s obligations under the term sheet.

Following the award, both parties approached the Delhi High Court (“Court”) for relief. OYO challenged the arbitral award, while Zostel sought an injunction to restrain OYO from proceeding with its proposed initial public offering (IPO), arguing that such an action would impact the enforcement of the award. Zostel also sought specific performance of the term sheet.

The Court, while reviewing Zostel’s petition, analysed the term sheet and the arbitral award, but did not raise any concern regarding the Tribunal’s view that the term sheet was binding. However, it declined to grant either an injunction or specific performance, on the basis that the parties had not reached consensus on the drafting and execution of the definitive agreements. Moreover, the arbitral award did not direct OYO to specifically perform its obligations under the term sheet, but merely allowed Zostel to initiate appropriate proceedings seeking such relief.

Delhi High Court’s 2025 judgment 

On 13 May 2025, the Court delivered its judgment in OYO’s petition challenging the arbitral award rendered in favour of Zostel. The Court set aside the award on the ground that it violated public policy and was contrary to the provisions of the Arbitration and Conciliation Act, 1996. The Court examined three key issues in arriving at its decision:

• Whether the Tribunal’s finding on the binding nature of the term sheet was contrary to public policy?
  The Court observed that the term sheet expressly stated it was non-binding, except for certain specifically carved-out clauses. It noted that had the parties intended the term sheet to be legally enforceable in its entirety, such a disclaimer would not have been included. The Court emphasised that the term sheet was a preliminary document, which was contingent upon the negotiation and execution of definitive agreements. Although acknowledging that under the Court’s limited scope of review, it could not interfere with the findings of the award, it remarked that construing such a preliminary document as binding solely on the basis of the parties’ conduct would be tenuous.
  
• Whether the arbitral award addressed all disputes submitted to arbitration?
  The Court noted that Zostel had approached the Tribunal for specific performance of the term sheet and the execution of definitive agreements. However, the Tribunal did not issue a definitive direction for specific performance, merely stating that Zostel could initiate “appropriate proceedings” for such relief. Further, the Tribunal failed to address OYO’s argument that the term sheet, being determinable in nature, could not be specifically enforced.

• Whether the arbitral award was in conflict with the public policy of India?
  The Court underlined that the key commercial terms remained unsettled between the parties, and no definitive agreements had been executed. In light of this, it reiterated the settled position under Indian law that specific performance cannot be granted for incomplete or tentative agreements, even if preliminary steps or partial obligations were undertaken. The Court concluded that enforcing a preliminary arrangement such as a term sheet—particularly where key commercial terms are yet to be agreed—would undermine the fundamental principles of Indian contract law and enforcement of contracts in India.

SIGNIFICANCE OF THE JUDGEMENT

The OYO-Zostel dispute has emerged as a landmark case in the context of the enforceability of term sheets in mergers and acquisitions. In its 2022 judgment, the Court declined to grant specific performance of the term sheet in Zostel’s favour but refrained from addressing the Tribunal’s finding that the term sheet was binding. This left room for interpretation that even non-binding term sheets could, depending on the parties’ conduct and factual circumstances, give rise to enforceable obligations.

However, the Court’s 2025 judgment has now provided greater clarity on this issue. The Court held that where a term sheet expressly states that it is non-binding and is subject to the execution of definitive agreements, such a document must be interpreted in accordance with its express terms. The Court reiterated that the language of the term sheet reflects the intent of the parties, and that conduct alone cannot make the term sheet legally binding.

This judgment aligns with a broader judicial trend in commercial disputes, where courts have consistently prioritised the express language of term sheets. Particular attention is paid to whether the term sheet includes qualifiers such as “binding” or “non-binding” in its preamble or operative provisions.

For instance, in Best on Health Ltd. v. Bestech India Pvt. Ltd.², the Punjab and Haryana High Court held a term sheet to be binding, emphasising that both the language used and the substantive provisions evidenced a clear intention to be legally bound.

Conversely, in Azeem Infinite Dwelling v. Patel Engineering Ltd.³, the Karnataka High Court held that a term sheet related to a land buyout was not binding. The court noted that the term sheet was expressly stated to be operative only until execution of the definitive agreement. As no such agreement was executed within the stipulated period, the court held that the term sheet amounted merely to an offer, and could not be enforced.

POSITION IN UK AND USA

United Kingdom

Under English law, term sheets are generally not enforceable where they are construed as mere “agreements to agree.” The courts require that the agreement reflects sufficient certainty on all essential terms; in the absence of such certainty, the document is deemed legally unenforceable. The inclusion of the phrase “subject to contract” is of particular significance—English courts interpret this language strictly, viewing it as a clear indication that the parties do not intend to be legally bound until a formal agreement is executed.⁴ 

United States of America

Term sheets in the United States are generally non-binding unless the parties intend otherwise and commonly contain an obligation to negotiate in good faith. A breach of this duty may expose a party to liability, including expectation damages corresponding to an amount reasonably anticipated under the definitive agreements.⁵ In the United States, the enforceability of term sheets varies by jurisdiction. The courts in New York and Delaware, distinguish between two categories of preliminary agreements. Type I agreements are fully binding and reflect consensus on all material terms, essentially functioning as final contracts. Type II agreements, on the other hand, are not binding by themselves but impose an obligation on the parties to continue negotiations in good faith. Recent decisions indicate that the courts in New York have adopted a holistic approach in determining the enforceability of term sheets, taking into account the scope and purpose of the term sheet and how the provisions interact with one another.⁶ 

CONCLUSION

The OYO-Zostel case provides clarity on the enforceability of term sheets under Indian law. The ruling reinforces that term sheets are generally considered non-binding unless they unambiguously reflect a clear and mutual intention to create binding legal obligations. In assessing such intent, Indian courts place primary emphasis on the language of the document, rather than on the conduct of the parties alone.

For parties engaging in transactions such as mergers, acquisitions, strategic investments, or similar transactions, it is critical to ensure that the term sheet clearly articulates the parties’ intent—whether binding or non-binding. To maintain the preliminary nature of the arrangement, term sheets should include express disclaimers confirming their non-binding status, particularly with respect to key commercial and transactional terms that are yet to be finalised through due diligence and negotiation.

At the same time, if the parties wish to preserve enforceability over specific provisions (e.g., confidentiality, exclusivity, dispute resolution), such clauses should be clearly demarcated and labelled as binding. This distinction helps mitigate ambiguity and safeguards interests during the interim period between the execution of the term sheet and the signing of definitive agreements. 

[1] Oravel Stays Private Limited v. Zostel Hospitality Private Limited, 2025:DHC:3661.

[2] 2014 SCC OnLine P&H 11490

[3] 2024 SCC OnLine Kar 10320.

[4] RTS Flexible Systems Ltd v. Molkerei Alois Müller GmbH & Co KG, [2010] UKSC 14.

[5] SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013).

[6] Norton Rose Fulbright, The enforceability of term sheets: Commercial Division weighs in,https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/knowledge-pdfs/the-enforceability-of-term-sheets—commercial-division-weighs-in.pdf