Johnny Ho & Partners Ltd. v. Auscon Investment Ltd.
Read the full judgment text of HCA 4752/1998 on BabelCite. This High Court CFI judgment was delivered on 7 April 2000.
1. The Defendant was the owner of a building site at No. 85 Tak Ku Ling Road, Kowloon, Hong Kong ("the Site"). The Defendant planned to erect a 6-storey residential building on the Site ("the Project"), and appointed the Plaintiff as the main contractor to undertake the construction work. The architect of the Project was one Archicorp (HK) Limited ("the Architect").
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HCA004752/1998 HCA 4752/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 4752 OF 1998 ____________
____________ Coram: Deputy Judge Chu in Court Dates of Hearing: 17-20 January 2000 Date of Judgment: 7 April 2000 _______________ J U D G M E N T _______________ 1. The Defendant was the owner of a building site at No. 85 Tak Ku Ling Road, Kowloon, Hong Kong ("the Site"). The Defendant planned to erect a 6-storey residential building on the Site ("the Project"), and appointed the Plaintiff as the main contractor to undertake the construction work. The architect of the Project was one Archicorp (HK) Limited ("the Architect"). 2. The contract between the Plaintiff and the Defendant was signed on 15 November 1995. It comprises the Articles of Agreement dated 15 November 1995, the annexed Conditions of Contract, the Contract Drawings and Specification and the tender documents that had been accepted by the Defendant (collectively referred to as "the Contract"). 3. Under the Contract, the Plaintiff was responsible for the erection of the superstructure as well as the electrical works, and installation of the water and drainage system and the fire services system. 4. Under the Contract, the contract sum was stated to be $3,892,444.60. The Contract also provided that possession of the Site and commencement of the works shall take place 7 days after the Architect's written notice to take possession. The completion of the works shall take place within 200 calendar days from the date of possession of the Site. 5. It is common ground that on 3 June 1996, the Architect gave notice to the Plaintiff to take possession of the Site. Accordingly the commencement date of the works is 10 June 1996 and the completion date is to be 200 days thereafter. 6. It is also not in dispute that between July 1996 and April 1997, the Plaintiff had submitted 10 applications for interim payment. Based on these applications, the Architect had issued 10 interim payment certificates. In accordance with these certificates, the Defendant had paid a total sum of $2,943,523.60 to the Plaintiff. 7. In May 1997, the Plaintiff submitted the 11th application for payment. This was rejected by the Architect. In an interim certificate dated 19 May 1997, the Architect certified that a sum of $180,860.70 had been overpaid to the Plaintiff. 8. Thereafter, the Plaintiff did not submit any further application for interim payment. In about January 1998, the Defendant repossessed the Site from the Plaintiff. In March 1998, the Plaintiff submitted a final application for payment in the amount of $914,736.27. No payment certificate was issued by the Architect. 9. By a Form BA13 signed by the Plaintiff, the building was certified to be completed on 1 May 1998. The occupation permit was issued on 13 January 1999. 10. On 25 March 1998, the Plaintiff commenced these proceedings. In the writ, the Plaintiff claimed the sum of $914,736.27 as the balance of the contract sum plus variation or addition work. The amount was revised subsequently. In the Amended Statement of Claim filed on 19 February 1999, the amount claimed was revised to $1,196,138.44. This is on the basis that the contract sum had been revised to $4,620,000.00, together with variation work in the amount of $477,420.00 and site safety expenses of $188,000.00. 11. The Defendant denies that the contract sum had been revised and disputes the value of the variation work as well as the Plaintiff's entitlement to site safety expenses. In addition, the Defendant counterclaims against the Plaintiff for overpayment in the sum of $180,860.70, loans made to the Plaintiff in the total sum of $600,000.00, advanced payments made to the Plaintiff's sub-contractors in the sum of $449,800.00, liquidated damages for delay in completion in the sum of $2.24 million, damages for the costs of works to remedy the omissions and defects in the Plaintiff's works and damages representing depreciation in the value of the completed building due to delay in completion. The Defendant also seeks to set off the counterclaim against the Plaintiff's claim. The Evidence 12. The Plaintiff had called 3 witnesses. The first is Mr Johnny Ho, a chartered builder and the former director of the Plaintiff ("Mr J Ho"). He has since retired. Mr J Ho had been involved in the execution of the Project and in liaising with the Architect. He gave evidence that by the time the Site was ready for delivery to the Plaintiff, there was a lapse of 7 months since the making of the Contract. As a result of this delay, the Plaintiff had incurred and wasted overhead expenses and the material and labour costs had also gone up in the meantime. The Plaintiff therefore requested the Defendant to revise the contract sum to $4.62 million. Mr J Ho said that this request was conveyed by a Mr Mok King Chiu on the Plaintiff's behalf to Mr Daniel Ho of the Architect, who counter-offered a 6% discount. Based on this, the Plaintiff wrote on 5 June 1996 to the Defendant requesting for the contract sum to be revised to $4.37 million. According to Mr J Ho, this was accepted by Mr Daniel Ho on behalf of the Defendant. 13. Mr J Ho also testified that throughout the 10 payment certificates, the amounts certified and paid were less than the value of the work that had been rendered. He said that as a result of underpayment by the Defendant, the Plaintiff had been put under considerable financial difficulties and eventually had problems meeting its payment obligations to the sub-contractors. 14. Mr J Ho accepted that the Project had taken longer than 200 calendar days to complete, but he said the delay was brought about by the exceptional rainy weather, the variations made to the plan by the Architect and the Defendant's failure to arrange for the completion of the last manhole by the Drainage Department. According to Mr J Ho, the Architect had at one stage resigned and was not available on site for giving the necessary work instruction and approval. 15. Mr J Ho agreed that the Defendant had extended loans to the Plaintiff totalling $600,000.00 and had paid the Plaintiff's sub-contractors sums totalling $449,800.00. These amounts are to be deducted from the Contract. Mr J Ho did not dispute that some of the works under the Contract remained undone, but he said that the Defendant had agreed for the Plaintiff to vacate the Site in January 1998. It follows that the Plaintiff would not be responsible for any further work on the Site. Mr J Ho therefore said that the Plaintiff was not liable for the costs of the works effected on the Site after January 1998. 16. Mr Mok King Chiu also gave evidence. He is the sole proprietor of Universal General Contractors. He was not involved in the actual construction work of the Project. He had only been involved in helping the Plaintiff to prepare the documentation and the payment applications. He had also assisted the Plaintiff in the preparation of this action. 17. Mr Mok's evidence is that the revision of the contract sum was brought about by discussions between Mr J Ho and a Mr So of the Defendant. He echoed Mr J Ho's complaint that the Defendant had throughout underpaid the Plaintiff so that the payments received were insufficient to meet the Plaintiff's expenses and payments to its sub-contractors. Mr Mok said that after May 1997, the Plaintiff had suspended the works on site from time to time because there was no further payment from the Defendant. Eventually in October 1997, the Defendant promised to lend $300,000.00 to the Plaintiff on conditions that the Plaintiff would finish the works listed out in a letter dated 16 October 1997 and vacate the Site and that Mr J Ho would sign Form BA13 certifying completion and attend all necessary inspections until the occupation permit was issued. 18. Madam Zhu Hui Ren, the Plaintiff's representative in these proceedings, also gave evidence. She is the wife of Mr J Ho, and was involved in the Project generally. Similar to Mr J Ho and Mr Mok, she pointed out that the Plaintiff was operating under very tight budget, partly because of the expenses incurred and the increase in material and labour costs in the 7 months before commencement of the works, and partly because the Defendant had underpaid the Plaintiff. Madam Zhu complained that the Defendant had jeopardized the Plaintiff's control over its sub-contractors by effecting payments to the latter directly. 19. For the Defendant, 2 witnesses were called. The first is Mr Daniel Ho of the Architect. Mr Ho ("the AP") is the authorized person responsible for the design, co-ordination and supervision of the Project. For the purpose of this action, he had on behalf of the Architect prepared 2 reports. He certified that the value of the works completed by the Plaintiff was $3,316,173.37 and the value of the variation work was $209,863.80. He explained that the overpayment of $180,860.70 stated in the last interim payment certificate came about as a result of errors in the assessment made in the previous certificates. 20. The AP stated that the contract sum had not been revised to $4.62 million or $4.37 million or at all. He however accepted that under Clause 36(5) of the Conditions of Contract, the Plaintiff was entitled to adjustments at monthly intervals where the Wage Index had gone up by more than 10%. He agreed that because the Wage Index for the 1st and 2nd quarters of 1997 had gone up by more than 10%, upward adjustments by 1.13% and 2.63% should be made to the value of the works done in the 1st and 2nd quarters of 1997 respectively. 21. On the issue of the last manhole, the AP agreed that this was to be constructed by the Drainage Department. But he pointed out that under the Contract, the Plaintiff was responsible for building and connecting all the piping leading to the last manhole and was further responsible for arranging with the Drainage Department for the construction of the last manhole. He testified that although the piping leading to the last manhole had been built by the Plaintiff, it was discovered in early 1999 that the work did not conform to the standard prescribed by the Regulations under the Buildings Ordinance. 22. The AP stated that the Plaintiff had caused an excessive delay of more than 448 days. He, however, acknowledged that the Plaintiff would be entitled to some extension of time under the Contract to take into account, for example, rainy weather. He had not quantified the amount of extension of time to which the Plaintiff is entitled for this would, according to him, take a long time. The 448 days therefore had not taken into account any extension of time entitlement of the Plaintiff. He also agreed with the Plaintiff's suggestion that the delay regarding the last manhole and the overall delay is not solely the Plaintiff's fault. 23. The other witness for the Defendant is Mr Ho Yin Chung, the Defendant's manager ("Mr Y C Ho"). He gave evidence confirming the payments and loans made to the Plaintiff and the payments made to the Plaintiff's sub-contractors. He also gave a detailed account of the works carried out on the Site after the Plaintiff quitted in January 1998. Part of these works was to make up for works which the Plaintiff had omitted and the other part was to rectify defects in the Plaintiff's works. Mr Y C Ho explained that the costs for these works were paid by a Haw Hong (Holdings) Limited by way of loans to the Defendant. He further testified that the Defendant had suffered a 56% loss in respect of the value of the completed building by reason of the delay in completion. The Issues 24. The issues to be resolved in this trial are essentially factual and involve mainly calculations. They can be summarized as thus:
The Contract Sum 25. Clause 13 of the Conditions of Contract provides that the contract sum shall not be adjusted or altered in any way otherwise than in accordance with the express provision therein. Under Clause 36, it is provided that the contract sum shall be varied where the Average Wage Index has increased or decreased by more than 10%. 26. From the Average Wage Index provided by the AP, it can be seen that the increase in the Wage Index between November 1995 and June 1996 was less than 10%. It follows that under the Contract, the Plaintiff is not entitled to a revision of the contract sum, despite that site was only ready for delivery to the Plaintiff 7 months after the conclusion of the Contract and that the material and labour costs had gone up in the meantime. 27. It is the Plaintiff's case that the Defendant had agreed to revise the contract sum to $4.62 million (according to the Amended Statement of Claim) and $4.37 million (according to Mr J Ho's evidence). However, this is not borne out by the evidence. While Mr J Ho said that the revision was negotiated between Mr Mok and the AP, Mr Mok said that the negotiation was conducted by Mr J Ho with a Mr So of the Defendant. Quite apart from this inconsistency in evidence, the letters exchanged between the Plaintiff and the Defendant in the period around June 1996 do not support the Plaintiff's case that the Defendant, or the AP had on the Defendant's behalf, agreed to increase the contract sum. Noticeably, there is a letter dated 5 June 1996 from the Architect pointing out that the contract sum is not negotiable and rejecting the Plaintiff's request to increase the contract sum to $4.37 million. It is evident from this letter that the parties had not reached any agreement to increase the contract sum. 28. Mr J Ho, when giving evidence, had also asserted that this adjustment to the contract sum is as a matter of trade practice when there had been a rise in the material and labour costs. But other than his assertion, there is no evidence to substantiate and support the existence or notoriety of such trade practice. 29. I do not accept that the contract sum had been revised. I hold that it remained at $3,892,444.60 throughout. Amount due from the Defendant to the Plaintiff (1) Value of the works completed 30. In the latest version of the Statement of Claim filed on 19 February 1999, the Plaintiff stated that the value of the uncompleted work is $395,958.00. Applying the contract sum of $3,892,444.60, it will suggest that the value of the completed work is, according to the Plaintiff, $3,496,486.60. 31. In the 1st report of the Architect, the value of the works completed by the Plaintiff was certified to be $3,316,173.37. The AP had also set out in the report the basis from which this sum was derived. References had been made to the items of work which had not been carried out by the Plaintiff. 32. Having regard to the details set out in the Architect's report, I am prepared to accept the value certified by the Architect as the value of the works the Plaintiff had completed under the Contract. (2) Value of the variation work 33. According to the Plaintiff, the value of the variation work is $477,420.00, the particulars of which are set out in a list annexed to the final application for payment. In the Architect's report, the AP had commented that some of the items of variation work were duplications while some of the items were works falling within the Plaintiff's duties under the Contract. As a result, only 12 items of the works set out in the Plaintiff's list of variation work were accepted by the Architect and the amount certified was $209,863.80. This figure was based on the costs quoted by the Plaintiff, notwithstanding the Architect's observation that there was no valuation nor assessment of the works in the manner prescribed under Clause 11 of the Conditions of Contract. 34. Under Clause 11(1) of the Conditions of Contract, the Architect may issue instruction for variation work or give written sanction to variation work not proceeded by instruction. It is apparent that the approval of the Architect is required in determining what works constitute variation works. Despite the rejection by the Architect of the other 18 items set out in the Plaintiff's list of variation works, the Plaintiff had not taken any issue on it either by way of evidence from its witnesses or by questioning the AP. 35. Having regard to the contractual provision and the state of evidence before the court, I have come to the conclusion that the value certified by the Architect is to be accepted. (3) Adjustment on account of wage fluctuation 36. Under Clause 36(4) of the Conditions of Contract, where the Average Wage Index had gone up by more than 10%, then Defendant shall pay to the Plaintiff the amount by which the increase exceeds 10%. Clause 36(5) further states that at monthly intervals, the Architect shall review the Wage Index and calculate the increase in the Average Wage Index and add the same to the contract sum. 37. According to the evidence produced by the AP, the index at the time of the tender was 1,385.05. By the 1st quarter of 1997, the figure was 1,539.24. It was 1,560.02, 1,581.6 and 1,638.13 for the 2nd to 4th quarters of 1997. Accordingly, by the 1st quarter of 1997, the index figure had increased by 11.13%. By the 2nd to 4th quarters of 1997, the increase was respectively 12.63%, 14.19% and 18.27%. Hence, there should be a 1.13% increase for the price of the work rendered in the 1st quarter of 1997. As for the work done in the 2nd to 4th quarters of 1997, the increase would be 2.63%, 4.19% and 8.27% respectively. 38. The 1.13% increase is applicable to the work comprising the 8th interim payment certificate (covering 4 to 17 January 1997), the 9th interim payment certificate (covering 18 January to 28 February 1997) and the 10th interim payment certificate (covering 1 to 31 March 1997). The amounts under these 3 certificates are $312,572.00, $553,122.00 and $250,371.56. The adjustment that the Plaintiff is entitled to is therefore $3,532.10, $6,250.30 and $2,829.20, totalling $12,611.60. 39. In respect of the works completed by the Plaintiff after the 10th interim payment certificate and before it quitted the Site in January 1998, it is difficult to identify the time when the works were carried out as the Plaintiff had not submitted any further interim payment application. Doing the best I can, I will adopt the average of the increase in percentage for the 3 quarters and apply it to the value of the works completed after the 10th interim payment certificate. The value of the works completed after the 10th interim payment certificate is represented by the difference between the value certified and the amount certified in the 1st to 10th payment certificates, i.e. $3,316,173.37 - $2,943,523.60 = $372,649.77. The adjustment that the Plaintiff is entitled to is therefore: $372,649.77 x 1/3 (2.63%+4.19%+8.27%) = $18,744.30. 40. The total adjustment on account of wage fluctuation is therefore $31,355.90. (4) Additional site safety expenses 41. The Plaintiff has claimed a sum of $188,000.00 as additional site safety expenses. According to Mr J Ho, this represents the expenses for engaging a safety officer to guard the Site. The officer engaged was a Mr Law Ho Yin (羅浩賢), who was employed between August 1996 and April 1997. From the schedule of payments produced by Mr J Ho, Mr Law was paid salaries totalling $128,175.00. Mr J Ho's evidence is that, after Mr Law left, the Plaintiff resorted to the use of a metal gate to guard the Site. 42. Initially in the pleadings, the Defendant denied that the Plaintiff was required to incur such expenses. This is also the view taken by the Architect in its report. At the trial, the Defendant no longer disputes the necessity of incurring such costs. This is because apparently, the Plaintiff had previously applied for such expenses and the amount applied for was $188,000.00. The Architect had in the 8th interim payment certificate approved a sum of $187,826.00 as a provisional sum for site safety expenses and the Defendant had paid the same to the Plaintiff. 43. Since the amount actually incurred by the Plaintiff was only $128,175.00, which is less than the provisional sum approved and paid by the Defendant, there is no further entitlement to site safety expenses. (5) Retention money 44. As can be seen from the 10th interim payment certificate, a 5% retention money in the sum of $194,622.23 had been withheld by the Defendant. Since the defects liability period had long expired, this sum should now be released to the Plaintiff, subject to any set off arising from any defect in the works carried out by the Plaintiff. Amount due from the Plaintiff to the Defendant (1) Loans and advancements made by the Defendant 45. The Plaintiff does not dispute that it had received from the Defendant loans totalling $600,000.00 and that they remain outstanding. The Plaintiff also accepts that the Defendant had paid $449,800.00 in total to its sub-contractors and that the Plaintiff had not repaid the amount to the Defendant. (2) Costs of the works carried out after January 1998 46. The works which were carried out on the Site after the Plaintiff vacated the Site fall into 2 categories. The first relates to works under the Contract which the Plaintiff had not carried out. The second concerns works which the Defendant says were to rectify the inferior or defective works carried out by the Plaintiff. 47. With regard to the former, they relate to the installation of railings for staircases, metal gate for the ground floor entrance, letter boxes, the CCTV system, the cover of the manhole for cables and part of the fire services system and electrical work as well as the plastering and the painting work for the interior and external walls. There is also included in this category the salaries of a Mr Ng Chik Kung for the months of January to April 1998. Mr Ng was the site foreman of the Plaintiff before January 1998. After the Plaintiff left the Site, Mr Ng remained to work on the Site to oversee and assist in the discharge of the outstanding works. There is further included in this category premiums for workmen compensation insurance to cover the workmen carrying out the works on site. The total sum comes up to $593,609.00. 48. As for the remedial work, they relate to the dismantling and re-installation of fire rated doors, toilet facilities and kitchen doors, re-constructing the inverted beam of the ground floor shop premises and the beams from 5/F to the roof, and also touching up on the staircase railings and the painting work. The cost comes up to $207,000.00. 49. The Plaintiff does not dispute the Defendant's case that some of the works under the Contract remained outstanding when it quitted the Site in January 1998. It is also apparent from the letter dated 26 May 1998 from the Buildings Department to the Architect that remedial works were required to be effected in order to meet the requisite standards of the various Regulations under the Buildings Ordinance and the requirements of the Buildings Department. 50. The Plaintiff disputes liability for the costs of all these works on the basis that they were done after the Site was re-delivered to the Defendant and the Plaintiff was not informed of the execution of these works nor asked to carry them out. According to Mr Y C Ho, the Defendant had engaged other contractors or sub-contractors to perform these works in order to avoid further delay. The Defendant's view that the Project would be further delayed if the Plaintiff were to be asked to do these works is not an unjustifiable nor unreasonable one. By January 1998, it was one and a half years since the commencement of the works, yet the works under the Contract remained uncompleted. It is also clear from the evidence of Mr Mok, Mr Y C Ho and the AP that the Plaintiff had intermittently suspended works on the Site and had not been doing any work for some months after April 1997. 51. Mr Y C Ho had in his evidence also explained that the quotations and the prices quoted by these contractors and sub-contractors had been carefully considered by the Defendant before they were accepted. There is in any event no evidence to suggest that the prices are excessive or unreasonable. 52. I am of the view that the Defendant is entitled to have the costs of these work deducted from the amount payable to the Plaintiff, save one exception. This concerns the work by Dickming Engineering Company in relation to 10 sets of drainage pipes for the washing basins in the amount of $15,000.00. Dickming Engineering Company was a sub-contractor of the Plaintiff. According to Mr Y C Ho, the work was incurred in order to meet the requirement of the Buildings Department. Dickming Engineering Company did not accept that the original work was defective and demanded payment. The Defendant acceded to it and paid Dickming Engineering Company on the basis that the amount was not substantial. If indeed the original work was not defective as Dickming Engineering Company contended, there is no justification for making the Plaintiff responsible for the costs of re-building the piping. If, on the other hand, the original work was sub-standard or defective, then there is no justification for Dickming Engineering Company to charge and be paid the remedial work. This $15,000.00 should not be borne by the Plaintiff. 53. The amount that the Plaintiff is responsible for the outstanding work under the Contract should take into account the value of these works under the Contract. The net amount which the Plaintiff is liable is therefore: $593,609 - $576,271.23 = $17,337.77. As for the costs of the remedial work, the amount after deducting $15,000.00 is $192,000.00 (i.e. $207,000.00 - $15,000.00). (3) Liquidated damages for delay in completion 54. Under the Contract, the Defendant is entitled to claim liquidated damages calculated at $500 for each day of delay if the work could not be completed within the contract period of 200 days. 55. The Plaintiff denies liability for the claim. It says that the delay in completion was due to various reasons, including the rainy weather, the frequent revisions in the work instructions and the failure of the Defendant to arrange for the construction of the last manhole and so on. 56. The Architect had stated in the 1st report that the delay was no less than 448 days. However, the AP, when testifying, accepted that the Plaintiff should be entitled to certain extension of time by reason of rainy weather. He further agreed that the delay in completion was occasioned by several factors, and the fault does not lie solely with the Plaintiff. Given that the burden is on the Defendant to prove its entitlement to liquidated damages for delay, the evidence thus analysed is insufficient to support the Defendant's claim. 57. Having said that, it is not necessary for me to go into the details of the reasons said to have contributed to the late completion. Suffice it for me to say that having regard to the fact that it had taken 21/2 years for the occupation permit to be issued when the contract period was for 200 days, it will be very difficult for the Plaintiff to resist a claim for liquidated damages for delay in completion, had the Architect been able to provide a clear and accurate assessment of the period of delay for which the Plaintiff is responsible. (4) Depreciation in the value of the completed building 58. The Defendant's counterclaim under this head is premised on the basis that as a result of the delay in completing the works under the Contract, the value of the completed building had dropped because of the decline in the property market. 59. There are 2 difficulties in this part of the Defendant's counterclaim. The first had been alluded to in the preceding section of this judgment. As the evidence adduced by the Defendant cannot identify with precision the period of delay for which the Plaintiff is responsible, it becomes impossible for the court to determine what should be the relevant date for ascertaining the depreciation in the value of the completed building, and to say what is the extent of the Defendant's loss that the Plaintiff should be held responsible. 60. The second hurdle in the Defendant's case in this aspect is the evidence on the depreciation. What the Defendant had done is to refer to the market price of the flats in the vicinity of the Site in between 1996 and 1998 and to compare it to the sale price of the various units in the completed building. This is hardly sufficient for the purpose. To say the least, it is unknown whether these neighbouring units are suitable comparable. The reference to their sale price is of little or no assistance at all. The evidence adduced falls short of supporting a claim under this head. Summary 61. In the premises, the statement of account between the parties is as follows:
62. The amount which the Plaintiff is liable to the Defendant is in excess of the amount due from the Defendant to the Plaintiff. The Plaintiff's claim herein is therefore extinguished in full. It follows that the Plaintiff's claim has to be dismissed and that the Defendant is entitled to judgment on the counterclaim for the excess, i.e. $1,259,137.77 - $613,869.47 = $645,268.30. 63. Accordingly, the Plaintiff's claim herein is dismissed. There will be judgment for the Defendant on the counterclaim in the sum of $645,268.30 together with interest thereon at judgment rate from the date of the judgment to full payment. I also make an order nisi that the Plaintiff pays the Defendant the costs of the action, to be taxed if not agreed. The order nisi is to be made absolute after 14 days from the handing down of this judgment.
Representation: The Plaintiff, acting in person, represented by its director, Madam Zhu Hui Ren Mr J Vaughan, instructed by Messrs J Chan & Lai, for the Defendant
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