Hua Tyan Development Ltd v. Zurich Insurance Co Ltd and Another
Read the full judgment text of HCA 480/2009 on BabelCite. This High Court CFI judgment was delivered on 6 August 2012.
1. The plaintiff (“ the Insured ”) commenced this action in February 2009 against the 1 st defendant (“ the Insurer ”) and the 2 nd defendant (“ the Broker ”). The claim against the Insurer is for the sum of US$1.5 million odd (for convenience, “ US$1.5 million ” or “ the Insured Sum ”) being the value of the cargo covered by an insurance policy dated 11 January 2008 (“ the Policy ”). The claim against the Broker is for the same amount being loss arising from an alleged breach of the Broker’s
Cited by 22 cases · Cites 5 cases
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HCA 480/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 480 OF 2009 ____________
_______________ J U D G M E N T _______________ INTRODUCTION 1.The plaintiff (“the Insured”) commenced this action in February 2009 against the 1st defendant (“the Insurer”) and the 2nd defendant (“the Broker”). The claim against the Insurer is for the sum of US$1.5 million odd (for convenience, “US$1.5 million” or “the Insured Sum”) being the value of the cargo covered by an insurance policy dated 11 January 2008 (“the Policy”). The claim against the Broker is for the same amount being loss arising from an alleged breach of the Broker’s duties. 2.As between the Insured and the Insurer, the dispute is whether the Insured has breached a condition relating to the deadweight tonnage of the vessel concerned, the breach of which would entitle the Insurer to avoid the Policy. The Insurer also alleges material non-disclosure on the Insured’s part. 3.As between the Insured and the Broker, the dispute is whether the Broker has breached its duties owed to the Insured (if any). BACKGROUND 4.The following background is undisputed. 5.The Insured has been trading in timber, shipping round logs from Southeast Asia to China. Cargo insurance has been taken out by it through an insurance broker. Since late 2004, it was obtained through the Broker (the previous broker having ceased business). The insurance policies, including the Policy, were issued by the Insurer. 6.The vessel in question, MV Ho Feng No 7 (“Ho Feng 7”), has had a deadweight tonnage (“DWT”) of 8,960.13 (in other words, its DWT is less than 10,000). The cargo covered by the Policy, 1,894 pieces of round logs (“the Cargo”), was shipped onboard Ho Feng 7 around mid-January 2008. Ho Feng 7 unfortunately sank during the voyage and the Cargo was totally lost. THE INSURANCE DOCUMENTS (a) Usual process 7.The typical process through which the Insured obtained insurance coverage from the Insurer (through the Broker) was as follows (the verbal part of the process is in dispute and is left out here). 8.Ms Wong, a secretary of the Insured, would call Ms Ip of the Broker by phone (the Broker being an operation owned by her, her husband and other shareholders). Ms Ip would give Ms Wong an application form for Ms Wong to fill in. The completed application form would be returned to the Broker, who would then fax transmit it to the Insurer. 9.If the insured sum fell within the Broker’s authority (HK$3 million (about US$384,000)), a cover note and insurance policy would be issued by the Broker on the Insurer’s behalf. On the other hand, if the insured sum fell beyond its authority, the Broker would seek the Insurer’s approval before issuing the cover note and insurance policy. 10.It is not contended that the Insured was aware of the limit of the Broker’s authority and there is no proper basis to show that the Insured was aware of it. (b) The documents 11.There are 3 documents relating to the insurance of the Cargo: the application form, the cover note and the Policy. Below is a summary of the documents. 12.The application form bears the Insurer’s logo (at the top), name and contact particulars (at the bottom). There are boxes for particulars to be provided by the applicant (in this case, the Insured). The relevant boxes are:
There is no box for inserting the vessel’s DWT. 13.The cover note has the Insurer’s name, contact particulars and logo at the top. The one concerning the Cargo has been signed by the Insurer and countersigned by the Broker. 14.The Policy has various boxes including those for:
15.For completeness, it is noted that the Insured Sum was stated to be:
Nothing was mentioned by the parties about the slight difference in the amount. (c) The relevant terms 16.The following terms are relevant to the dispute in this action. 17.The cover note contains the following:
18.The Policy contains the following:
The age condition and the DWT condition are among the clauses so incorporated. 19.The above “cover note replacement” clause appears on all of the Insurer’s policies. (d) Previous insurance 20.From late 2004 to January 2008:
WITNESSES’ CREDIBILITY 21.One main factual dispute is whether:
22.The Insurer decided not to call any witness to testify, despite having filed witness statements (to which no weight will be placed when considering the evidence). 23.The Insured called Ms Wong, and the Broker called Ms Ip, to testify on their respective behalf. 24.The Insured does not accept that there was such standing instruction; it also denies having been expressly and specifically informed of the DWT condition. 25.In view of the above, the only source of evidence which can establish the matters summarized in para 21(a) and (b) above is Ms Ip’s testimony. 26.The relevant parts of Ms Ip’s testimony can be summarized as follows:
27.The test adopted for assessing witness credibility has been set out in Star Glory Investment Ltd v Kai Tuo (HK) Technology Co Ltd and Others, HCA 3523/2002 (13 August 2005), para 12:
28.Ms Ip’s testimony summarized above (especially para 26(2) and (3) above) is inconsistent with:
I will elaborate on the inconsistencies below. 29.The above inconsistencies can be discerned from a ruling handed down on 20 July 2012. For convenience, some of the passages are quoted below:
Ms Ip testified that the statement of truth of the Broker’s defence was signed by her husband, another of the Broker’s directors and shareholders. 30.The Broker avers that the Insurer (but not itself) failed to alert the Insured to the DWT condition (para 21(10), defence). However, the last-mentioned averment has to be understood in the context that the dealings were all conducted through the Broker. In other words, any information the Insurer had wanted to pass on to the Insured would have to be passed on by the Broker. By admitting that the Insurer had failed to do so, the Broker is in effect admitting that it also had failed to do so. 31.As stated above, about 90% of the previous policies did not contain the DWT condition. Ms Ip pointed out in her testimony those policies were signed by a clerk of the Broker (who, according to her, has always been instructed to include the DWT condition into the insurance policies). Insofar as she implicitly asserts that this was a mistake (she has not expressly so asserted), this is inherently implausible because (i) of the sheer proportion (and quantity) of such policies, and (ii) the Broker has only 5 working staff (including Ms Ip and her husband); hence, it must have been a relatively small office where supervision would be easy and in-office miscommunication would be unlikely. 32.By reason of the above matters, I do not accept Ms Ip’s testimony summarized in para 26(2) to (4) above. 33.The defence submits that Ms Wong’s testimony is unreliable because she did not have a clear independent recollection of her first contact with Ms Ip (which took place in late 2004, about 7-1/2 years before this trial). This is an answer only to be expected from an honest and fair witness. Bearing this in mind (and that Ms Ip’s testimony about the first contact having been rejected), I accept Ms Wong’s testimony as set out in her witness statement (especially para 9, 16 to 18 and 21 thereof) to be truthful and reliable. I also accept (and take into consideration in the paragraphs below) her testimony that:
FINDINGS OF FACT 34.The following findings of fact are made:
35.There is also an issue as to whether the Broker was the agent of the Insurer or the Insured. It is trite law:
36.The Broker may well be the Insured’s agent when fax transmitting the completed application form to the Insurer. But the Broker’s following acts since that point in time were performed as the Insurer’s agent:
Chitty on Contracts (1999) 28th Ed, Vol 2 also says:
Para 3(4), the Insurer’s defence is consistent with the above finding:
37.The following facts are also important to the above finding:
38.Finally, I accept the undisputed evidence (adduced by the Insured) that the particulars (including the DWT) of a named vessel are relatively easily available through the internet. 39.Whether the inclusion of the DWT condition into (or omission of the same from) the Policy was an error will be discussed under the heading “Dispute between the Insured and the Insurer” below. DISPUTE BETWEEN THE INSURED AND THE INSURER 40.This falls under 3 heads: contractual construction, rectification and estoppel. They will be dealt with under separate sub-headings below. (a) Construction of contract 41.The Insurer’s arguments regarding this aspect are put forth in the factual context below:
42.The parties have approached this aspect on the basis the terms of the cover note are the terms to be construed (para 17 above). The “cover note replacement” clause (see para 18 above) is one of the express terms of the insurance policies (including the Policy) the effect of which is those policies were to replace the related cover notes. 43.Because of the replacement of one contractual document (the cover notes) by another (the related insurance policies), it is difficult to understand why the matter ought to be so approached. The more germane contractual document for construction upon such replacement would seem to be the Policy itself. 44.I shall therefore approach this issue by construing the Policy:
45.Looking purely at the relevant terms of the Policy (that is, assuming the Policy has replaced the cover note), there is a clear inconsistency in that Ho Feng 7 was the vessel expressly named in the Policy, but at the same time the Policy stipulated that the vessel’s DWT must be not less than 10,000 (it being common ground Ho Feng 7’s DWT was less than that prescribed by the DWT condition). 46.In trying to resolve the said inconsistency in the Policy terms, the rule of construction below should be borne in mind:
47.The vessel expressly named in the Policy, Ho Feng 7, had a DWT which was less than that prescribed by the DWT condition. The nature of the Policy is a marine cargo insurance contract. To give effect to the named vessel, and not to do so for the DWT condition, would enable such an insurance contract to be carried into effect, namely, to provide insurance coverage for the Cargo. The purpose of the Policy has also been similarly expressed:
The insurable interest was identified by reference to the bill of lading. Thus, the “Subject Matter Insured” was described in the Policy as:
48.To put the same point in another way, it cannot be the contractual intention for the Policy to mean that, despite the payment of premium by the Insured, it could never take effect purely because the vessel named therein never fulfilled the DWT condition. 49.I now turn to consider the parties’ arguments based on the part of the cover note which reads:
(“the vessel clause”). 50.According to the Insured, the vessel clause refers to two types of vessel: an “approved vessel” and “vessels to be declared”. Ho Feng 7, so says the Insured, belongs to the former type. 51.The Insurer disagrees and contends that the vessel clause refers to only one type of vessel, namely, “approved vessel or vessels”. Because of the phrase “to be declared (and so on)”, I take it that the “vessel or vessels” may subsequently be declared (or made known to the Insurer). 52.The word “subsequent” must refer to anytime after the issuance of the cover note. On the other hand, logically a vessel must be made known (that is, declared) before it can be approved. In the factual context of this action, the latest time for making the declaration would be at the time of issuance of the insurance policies. 53.Hence, if the vessel clause bears the meaning contended for by the Insurer, the words “to be declared” would seem to be otiose. I therefore do not agree with the Insurer’s contention and agree with the Insured’s (para 50 above). 54.But even if the Insurer’s above contention was correct (that is, even if the vessel clause only refers to one type of vessel), Ho Feng 7 should still fall within the meaning of “approved vessel” when the Policy was issued. This is because:
55.Thus, irrespective of whether the proper construction of the vessel clause should be that contended for by the Insured (which I prefer) or that by the Insurer, Ho Feng 7 should fall within the meaning of “approved vessel” in the cover note. 56.Having concluded effectively in the Insured’s favour, and insofar as it may be necessary to do so, para 45 to 48 above are repeated. 57.It is trite law that:
(b) Material non-disclosure 58.The Insurer also argues that an insurance contract being a contract of utmost good faith (uberrimae fidei), it was the Insured’s duty to make full and frank disclosure. It argues that merely disclosing the vessel’s name but not its DWT is insufficient to discharge that duty. 59.The duty of utmost good faith falls on both parties to the contract: Chitty, Vol 2, para 41-026, text to n 80; s 17, Marine Insurance Ordinance (Cap 329). 60.The duty is threefold: a duty to disclose material facts; a duty not to misrepresent material facts; and a duty not to make fraudulent claims. The first of the 3 duties is in question in this action. In relation to an assured,
(see also s 18, Cap 329 (especially s 18(2))). In relation to an insurer,
The Insurer’s duty of utmost good faith will be further discussed under the heading “Dispute between the Insured and the Broker” below. The relevant duty of utmost good faith under this heading is that of the Insured. 61.“The duty of disclosure extends only to facts which are within the knowledge of one party but not within the knowledge of the other”: Chitty, Vol 2, para 41-028. One of the authorities relied on by the Insurer is Bates v Hewitt (1866-67) LR 2 QB 595. The court there said:
62.It is common ground the Insured was a trader of goods; it was not the owner of the vessels named in the insurance policies. The bill of lading named a Malaysian company as the shipper, and a Shanghai company as the notified party. The precise legal relationship of the Insured in relation to the charter parties is unclear (despite Ms Wong’s testimony to the effect that someone in Shanghai arranged them for the Insured). 63.Such being the case, the particulars pertaining to Ho Feng 7 cannot properly be regarded as information within the knowledge of the Insured, but not within that of the Insurer. It is not crucial to determine precisely which of them should be better placed to obtain such information (it seems the Insurer (being in the marine insurance business) should have ready and easy access to the same), suffice it to say the information should be available to both parties. 64.By virtue of the above matters, I do not find the Insured to have breached its duty of disclosure. (c) Rectification 65.Having so concluded, it is strictly unnecessary to consider this aspect. I shall do so for completeness. 66.In short, by reason of the matters set out in para 20 and 41 to 56 above, I agree with the Insured that the insertion of the DWT condition must have been an error, and did not represent the contracting parties’ common intention. 67.I disagree with the Insurer that:
Sub-para (2) above is irrelevant. What is relevant is it has been found as a fact that the Insurer either directly knew Ho Feng 7 was the vessel for shipping the Cargo (para 54(1) above); alternatively, it knew of the same constructively through the Broker (para 54(2) and (3) above). 68.I have taken into account Ms Wong’s testimony to the effect she has read the cover note and the insurance policies and she saw the DWT condition. I consider she was not sufficiently sophisticated or experienced in marine insurance matters to enable her to appreciate its significance. For that reason, that part of Ms Wong’s testimony does not adversely affect the Insured’s case (and cannot assist the Broker’s case). 69.Thus, if it had been necessary to do so, I would have rectified the Policy by deleting the DWT condition. 70.In relation to para 67(2) above, it is noted that mistake of fact is not part of the Insurer’s case. If the Insurer had relied on the same, as has been pointed out by the Insured (para 5 to 10c and 10d to 10h, Insured’s closing submissions), the failure to call evidence would have resulted in an adverse inference being drawn against the Insurer regarding whether it was aware of Ho Feng 7’s DWT. Para 38 and 63 above are repeated. (d) Estoppel 71.Save as to the limited estoppel referred to in para 72 to 74 below, nothing need to be said about this aspect. 72.Chitty, Vol 2, para 41-039 observes that:
73.First, because the Broker has fax transmitted the application form to the Insurer before the issuance of the Policy (and the cover note), by the time of issuance of the cover note and/or the Policy, the Insurer knew (or ought to have known) of the name of the vessel. 74.Secondly, in any event, by the time when the Broker issued and sent over the Policy (who, as has been found to be a fact above, did so as the Insurer’s agent), the Broker’s knowledge of the named vessel (Ho Feng 7) was imputed to the Insurer. Such knowledge should date back to when the Broker received the application form (and fax transmitted it to the Insurer), or, at the latest, by the time of issuance of the Policy. DISPUTE BETWEEN THE INSURED AND THE BROKER 75.Because I already find in the Insured’s favour regarding its claim against the Insurer, practically there is no need to deal with the Insured’s claim against the Broker (which is alternative to that against the Insurer). I shall do so again for completeness (this may also be relevant to the costs between the Insured and the Broker). 76.It goes without saying the discussion below is premised on the Insurer being entitled to avoid the Policy on the ground that the Insured has (i) breached the DWT condition, and/or (ii) been guilty of material non-disclosure. 77.I agree with the Broker to the extent that, in order to establish its claim against the Broker, the Insured would have to establish:
Once the Broker’s duties (if any) have been ascertained, whether (and if so how) the Broker has breached any of those duties is a relatively easier task in the factual context of this action. 78.In relation to the first of the above two issues (scope of duties), it is crucial to first ascertain the nature of the relationship (especially contractual relationship) between the Insured and the Broker. 79.Emphasis has been placed by the Broker on the decision in Kam Hing Trading (Hong Kong) Ltd v PICC (Hong Kong) Ltd, HCCL 27/2009 (31 August 2010). The court there found the insurance broker:
80.The relationship between the Insured and the Broker lasted quite a bit longer than that in the Kam Hing case. By the time of the Policy (11 January 2008), the parties have dealt with each other for about 3 years (since late 2004). The dealings between them always concerned marine cargo insurance coverage, and over 70 insurance policies have been issued through the Broker. 81.Even in the Kam Hing case, where the insurance broker’s position was a mere “convenient ‘sourcing agent’ ”, the court did not find the nature of the contract to “necessarily [dispose] of the success or otherwise of the plaintiff’s case against [the broker]” (para 227 thereof). 82.Because of the difference in the nature of the relationship between the Insured and the Broker, the legal principles governing the scope of the Broker’s duties (if any) will have to be found elsewhere than the Kam Hing case. 83.The court in the Kam Hing case also relied on the experience and sophistication of the plaintiff trader. There is no evidence concerning the Insured’s experience or sophistication. The only fact pertaining to trading experience is that the Insured has been trading in timber since about 1994 (about 14 years before the issuance of the Policy). In fact, it would appear that the Insured’s insurance experience would be more important to this aspect; there is practically no evidence about this. 84.Ch 16, Jackson & Powell on Professional Liability (2012) 7th Ed deals with the position of “Insurance Brokers”. The learned authors begin by distinguishing between an “insurance agent” and an “insurance broker”. The former:
On the other hand, the latter:
The Broker has been found to be the agent of both the Insurer and the Insured (for details, see para 36 to 37 above). 85.Jackson & Powell also discusses the breach of an insurance broker’s duty to his client:
86.Specific instances in which insurance brokers have been held liable for breach of duty are also discussed in Jackson & Powell under different headings (which the learned authors said are not exhaustive (para 16-041 thereof)). They are failure:
87.The reason why the Insurer was able to avoid the Policy was because Ho Feng 7’s DWT did not meet the requirement of the DWT condition. The avoidance could have been based on (i) breach of the DWT condition, and/or (ii) material non-disclosure of facts. (see also para 76 above) 88.It cannot be disputed the Insured’s instruction to the Broker was to obtain marine insurance coverage for the Cargo; the terms of the Policy expressly said so (para 47 above). 89.In relation to the failure to effect insurance (para 86(a) above), Jackson & Powell says:
90.The facts of this case have been set out under the heading “Findings of Fact” above (para 34 to 38 above). As stated above, the two terms of the Policy relevant to the Insurer’s entitlement to avoid it were:
91.It would be obvious to a reasonably prudent insurance broker that, in order for the Policy to be effective, Ho Feng 7’s DWT should meet the requirement of the DWT condition (this duty is set out in para 86(d) above). Two authorities cited in Jackson & Powell illustrate the extent of that duty:
The Broker ought reasonably to have made sure that the Policy met the Insured’s requirement (that is, the Policy was effective for the Cargo which was shipped by Ho Feng 7). 92.A broker also has a duty to give proper advice (this duty is set out in para 86(j) above). The relevant parts of Jackson & Powell read:
Bearing in mind the matters set out in para 89 above, the Broker ought to have advised the Insured of the requirement of the DWT condition. 93.At least in the factual context of this action, the Broker’s above duty to give proper advice should be linked to its “separate personal duty of disclosure (besides an insured’s duty to disclose all material facts which he either knows or is deemed to know)” (this duty is set out in para 86(g) above). Jackson & Powell has the following to say on this:
One of the Insurer’s complaints in this action is the Insured’s (and, for present purpose, the Broker’s) failure to make disclosure of a material fact, namely, Ho Feng 7’s DWT. As stated para 76 above, for the purpose of this discussion, the Insurer is assumed to have succeeded on this complaint. Here the Broker should have (but has not) made the disclosure for the Insured. 94.By reason of the matters set out above, I find that the Broker ought to be held liable to indemnify the Insured, had the Insurer been able to avoid the Policy. I have been able to do so without regard to the parties’ pleadings (which the Insured also relies on in support). I shall set out the relevant parts of the pleadings for ease of reference. 95.Para 4, Broker’s defence avers:
Para 3, statement of claim is also set out below. So as to show what the Broker has admitted, the admitted portions of that part of the statement of claim are highlighted:
96.On the other hand, as has been pointed out above, the duty of disclosure also lies with an insurer (para 59 to 60 above). The Insurer should disclose facts relevant to “… the recoverability of a claim under the policy which a prudent assured would take into account in deciding whether or not to place the risk with the proposed insurer” (Chitty, Vol 2, para 41-027, text to n 1). A failure to disclose would enable an assured to avoid the insurance policy. 97.In the factual context of this action, that fact would be the insertion of the DWT condition into the insurance policies (including the Policy). 98.The Broker has been found to be the Insurer’s agent when issuing and sending over the cover note and the Policy, and was the Insurer’s only point of contact with the Insured. Thus, the Insurer’s duty of disclosure could only be performed through the Broker. 99.Having said so, it would appear the Broker’s duty to disclose set out in para 96 to 98 above was owed to the Insurer, and not to the Insured. It is set out above for completeness only. 100.The Broker also argues that the statement of claim is defective in failing to properly plead what duties it owed to the Insured (if any). I disagree with the argument and agree with the Insured that the averments in the statement of claim are adequate. Specifically, the duty to:
The only duty on the Broker’s part which has not been pleaded is its duty to disclose (para 93 above). 101.The Broker also raises an issue regarding the causation of loss; it is argued that the Insured has failed to establish this. The relevant legal principles set out in Jackson & Powell are:
It appears the issue raised by the Broker belongs to the latter category. 102.The Broker asserts in its closing submissions that:
or
103.There is no substance in the assertion because:
It can be inferred from the first matter (in the absence of material showing the contrary) that the Insurer would have insured the Cargo without including the DWT condition. The proper inference which can be drawn from the second matter is that there were other insurer(s) willing to do so even if the Insurer was not (Ms Ip’s testimony to the contrary effect is not accepted). 104.Part of the Broker’s argument on causation seems to be premised on an urgent need on the Insured’s part to obtain the Policy (para 111 to 114, Broker’s closing submissions). This is a misconceived argument in view of the 3-year or so period of previous marine insurance dealings between the two parties. 105.I also reject the Broker’s arguments regarding the Insured’s alleged:
in view of the nature of the Broker’s duties which I find it has breached (especially the duty to give proper advice). It would be turning the duty to give proper advice on its head if an assured is held to be contributorily negligent over matters on which he should be properly advised (but was not). 106.On the quantum of damages, I agree with the following principle enunciated in Arnould’s Law of Marine Insurance & Average (2008) 17th Ed:
Matter sufficient to justify a departure from the above has not been adduced. 107.Finally, on the Broker’s complaint that there has been a failure to adduce expert evidence, I do not consider that to hamper the proper determination of this part of the action. DISPUTE BETWEEN THE INSURER AND THE BROKER 108.There is also a claim for indemnity/contribution by the Insurer against the Broker. 109.They agree to postpone their submissions regarding this claim until after this judgment has been handed down. CONCLUSION 110.Judgment is entered against the Insurer in the Insured’s favour as prayed for in the statement of claim. 111.No order on liability or quantum is made as between the Insured and the Broker. 112.By consent, the indemnity/contribution claim between the Insurer and the Broker is adjourned sine die with liberty to restore (initially for a 30-minute hearing). OTHER MATTERS 113.The parties’ closing submissions also mentioned various other points. These have not been expressly set out or dealt with in the above headings and sub-headings. This is so only because of the need to balance between the length of the judgment and its comprehension. It does not mean those other points are thought to be irrelevant (or have been overlooked). To avoid doubt, those other points have also been considered. COSTS ORDER NISI 114.There is no apparent reason to depart from the usual rule that costs should follow the event. There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of this action be paid by the defendants to the plaintiff to be taxed if not agreed. 115.It is unclear if the plaintiff also seeks a certificate for two counsel, and if it does, whether this will be opposed. If such an application should become necessary, the parties are at liberty to lodge with court and serve their respective submissions within 21 days from the date of this judgment.
Mr Chan Chi Hung SC leading Mr Jeremy S K Chan,, instructed by S K Lam, Alfred Chan & Co, for the plaintiff Mr Russell Coleman SC, instructed by Reed Smith Richards Butler, for the 1st defendant Mr Colin Wright, instructed by Leung & Lau, for the 2nd defendant Please refer to CACV190/2012 for the relevant appeal(s) to the Court of Appeal. | ||||||||||||||||||||||||||||||
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