Judicial Analysis of Supreme Court Appeal No. 155/2023: Arbitration and Public Policy

Background of the Case: This case pertains to an appeal filed by the Respondent-Petitioner-Appellant, Ceylon Electricity Board (CEB), challenging an arbitral award dated October 29, 2013. The arbitral award was in favor of the Claimant-Respondent-Respondent, Heladhanavi Limited. The matter concerns a Power Purchase Agreement (PPA) entered into in 2003 between the parties, under which disputes arose related to payments classified under “change in law events” and “reimbursable taxes.”

Key Issues for Consideration: The appeal focused on three primary legal questions:

1. Whether the arbitral award conflicted with the public policy of Sri Lanka due to illegality or offensiveness to the public.
2. Whether the tribunal’s findings violated substantive Sri Lankan law, specifically the Inland Revenue Act and the Arbitration Act.
3. Whether the issues raised were a re-agitation of matters already decided by the arbitral tribunal.

Arguments by the Appellant (CEB):

• The Inland Revenue (Amendment) Act No. 12 of 2004 imposed no additional financial burden on Heladhanavi Limited (the Respondent) since the obligation was to deduct and remit taxes on dividends to the Inland Revenue Department.
• The invoices presented by Heladhanavi erroneously claimed reimbursement under “reimbursable taxes” for amounts related to dividend taxes.
• Payments made by CEB were due to oversight and later adjustments were necessary to recover excess payments amounting to LKR 215,203,184.
• The arbitral tribunal erred in interpreting the PPA and the Inland Revenue Act, constituting a violation of public policy.

Arguments by the Respondent (Heladhanavi Limited):

• The arbitration findings were based on factual and legal grounds, and re-agitation undermines the principle of party autonomy.
• The tribunal correctly identified dividend tax as part of a “change in law event” under the PPA.
• The claim for reimbursement of dividend tax paid was legitimate and aligned with the terms of the agreement.

Supreme Court’s Analysis and Decision:

1. Public Policy Concerns:
   • The court reiterated that “public policy” involves fundamental principles of law and justice. Errors in fact or law by the tribunal do not inherently constitute violations of public policy unless they significantly harm the State or society.
   • The tribunal’s interpretation of the Inland Revenue Act did not deprive the State of revenue or violate statutory provisions. Hence, the award did not conflict with public policy.
2. Tribunal’s Findings:
   • The tribunal’s decision that dividend tax payments fell under “change in law events” was supported by the PPA’s terms and factual evidence.
   • Errors in the tribunal’s interpretation of the PPA or Inland Revenue Act were not considered “patently illegal” to justify overturning the award.
3. Party Autonomy and Scope of Review:
   • The Arbitration Act limits judicial review to narrow grounds, preserving the finality of awards.
   • Re-examining factual and legal determinations extensively would undermine the arbitration process.
4. Unjust Enrichment Argument:
   • The Appellant’s claim that enforcing the award would result in unjust enrichment was not substantiated with evidence during arbitration.

Conclusion: The Supreme Court dismissed the appeal, upholding the arbitral award in favor of Heladhanavi Limited. It emphasized maintaining the integrity of arbitration by limiting judicial interference to cases of genuine public policy violations.

Implications: This judgment reinforces the principles of party autonomy and finality in arbitration. It underscores the judiciary’s cautious approach in intervening with arbitral awards, particularly when allegations of public policy violations are not supported by substantial evidence.

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