Arbitrator Cannot Disregard Agreement To Treat WhatsApp Exchanges As Concluded Contract: Bombay High Court

The Bombay High Court has held that an arbitrator cannot disregard the terms of the contract under which a dispute was referred to arbitration and treat WhatsApp exchanges as a separate concluded agreement when that was never the pleaded case.

Justice Sharmila U. Deshmukh partly set aside an arbitral award in a family partnership dispute involving a husband, his wife, and other family members.

The court quashed the direction to pay 9% annual interest on a ₹5 crore loan, which the arbitrator had based on WhatsApp exchanges, while leaving the principal amount and the wife's retirement from the firm undisturbed.

“By considering the whatsapp message as concluded contract the Learned Arbitrator has foisted a new contract upon the parties, which was not even the pleaded case of the Respondent No 1. The arbitrator is the creature of the contract and was bound to consider the terms of the contract under which the dispute was referred to arbitration. The dispute was referred in context of the partnership agreement and the Learned Arbitrator has categorically held that it has not delved into the question of interpretation of the partnership agreement and amended Clause 23, which it was bound to do. It was not permissible for the Learned Arbitrator to ignore the terms of partnership deed when the reference arose from the partnership deed and create a new contract between the parties,” the court observed.

The dispute arose from a family partnership firm comprising Sandeep Dixit, Rekha Dixit, their daughters Smruti Dixit and Sneha Dixit, and Sandeep's mother Suchitra Dixit.

Rekha was admitted to the partnership through an amended deed dated August 19, 2021. She advanced ₹5 crore to the firm on September 6, 2021.

Rekha claimed that she was regularly paid interest at 9% a year from October 2021 to July 2022. The payments were ₹2.5 lakh a month after the deduction of taxes.

Sandeep left the matrimonial home in or around July 17, 2022, following matrimonial disputes and stopped making the payments. Rekha then issued a notice dated September 20, 2022, seeking dissolution of the firm and repayment of the ₹5 crore loan with interest.

She invoked arbitration on September 28, 2022. The Bombay High Court appointed a sole arbitrator on December 23, 2022.

During the proceedings, Rekha did not press her request for dissolution of the firm. She instead pursued her alternative claim seeking retirement from the partnership.

By an award dated July 30, 2024, the arbitrator declared Rekha retired from the firm with effect from March 2, 2023. She was also held entitled to a 20% share in the firm's profits as of September 20, 2022.

The arbitrator further directed Sandeep, Smruti, Sneha, and Suchitra to jointly and severally pay Rekha ₹5 crore along with 9% annual interest from August 1, 2022, until payment or realization.

Senior Advocate Ashish Kamat, appearing for Sandeep, argued that the partnership deed did not provide for interest on the loan. He contended that the arbitrator had wrongly treated WhatsApp exchanges as a separate contract governing the interest payable on the ₹5 crore.

Kamat also argued that the finding amounted to patent illegality because Rekha had never pleaded that the WhatsApp messages themselves constituted an independent agreement.

Advocate Nishtha Garg, appearing for Rekha, submitted that the arbitrator had considered the partnership deed along with the WhatsApp correspondence. She argued that the correspondence merely clarified the actual rate of interest agreed between the parties and did not alter the terms of the partnership deed.

The court found that Rekha's interest claim was based on Clause 23 of the partnership deed, which applied to capital contributions and not the ₹5 crore loan.

During cross-examination, she stated that the 9% interest rate had been agreed orally and that the calculation was shared over WhatsApp. The arbitrator relied on WhatsApp exchanges dated June 16 and December 10, 2021 to hold that 9% interest was payable on the loan.

It held that the exchanges constituted a contract for payment of 9% annual interest on the ₹5 crore loan.

The court noted that Rekha's pleaded case was that Clause 23 entitled her to interest at a rate not exceeding 12% a year and that she had accordingly been paid 9% interest.

It further noted that Rekha had not deposed that the WhatsApp exchanges themselves constituted a contract between the parties. Her evidence maintained that interest was payable under the amended Clause 23.

The arbitrator had also overlooked the firm's balance sheets and income-tax returns, which showed the ₹2.5 lakh payments as loan repayments. Instead, it treated those payments as interest on the loan.

The court held that the arbitrator was bound by the partnership deed because the dispute had been referred to arbitration under that agreement. It could not disregard its terms and create a new contractual basis from the WhatsApp exchanges.

The court held that the arbitrator's finding granting 9% annual interest on the ₹5 crore loan, based on the WhatsApp exchanges, suffered from patent illegality.

At the same time, the court found that the interest portion could be separated from the rest of the award. It therefore quashed the direction granting 9% interest on the ₹5 crore loan while leaving the remaining portions of the award undisturbed.

For Petitioner (Sandeep Dixit): Senior Advocate Ashish Kamat, with Advocates Mohit Khanna and Sayli Shinde, instructed by M/s Kartikeya & Associates.

For Respondent (Rekha Dixit): Advocate Nishtha Garg, instructed by Advocate Abhishek Adke.