Annee Pty Limited v Eliopoulos
[2014] ACTSC 341
•18 December 2014
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Annee Pty Limited v Eliopoulos |
Citation: | [2014] ACTSC 341 |
Hearing Date(s): | 24 November 2014 |
DecisionDate: | 18 December 2014 |
Before: | Mossop M |
Decision: | See [47] |
Category: | Principal Judgment |
Catchwords: | CONTRACT – contractual interpretation – when loans repayable upon termination of lease “if an option is not exercised” ‑ whether option exercised in accordance with the contract – rectification – whether contract fails to give expression to the true intention of the parties |
Cases Cited: | Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 |
Parties: | Annee Pty Limited (Plaintiff) Dimitri Eliopoulos (Defendant) |
Representation: | Counsel: Mr R J Arthur (Plaintiff) Mr D Robens (Defendant) |
| Solicitors: Bradley Allen Love (Plaintiff) Kamy Saeedi Law (Defendant) | |
File Number(s): | SC 343 of 2013 |
Introduction
These proceedings involve a claim by the plaintiff against the defendant arising out of three loans totalling $380,000 made by the plaintiff to the defendant in September 2009, June 2010 and April 2011. The issue between the parties is whether or not those loans have become repayable. That depends upon the terms of a written agreement between the parties. The plaintiff contends that the loans became repayable on 30 September 2012. The defendant contends that under the agreement the loans did not become repayable on that date. In the alternative, the defendant seeks an order rectifying the agreement with the effect that the loans would not have become repayable on that date.
Background
The sole director of the plaintiff is Nicholas Carter. He is a chef by trade. The defendant is Mr Carter’s wife’s cousin. Mr Carter has known the defendant for 16 to 18 years. In 2008 the defendant approached Mr Carter with a business proposal. The proposal was to open a restaurant and bar and for Mr Carter to run the kitchen. Mr Carter ultimately agreed and the restaurant and bar, trading under the name “The Kennedy Room”, opened on 25 September 2009. Prior to that date Mr Carter had been involved with the design and fit out of the kitchen in the premises while the defendant was responsible for the other aspects of the set up of the business.
Mr Carter had been given a copy of the lease that existed over the premises by the defendant (“2007 Lease”) prior to entering into the agreement with the defendant. The defendant told him that the lease ran to 2012 and after that there was an option for a lease until 2017. The company which the defendant controlled, Clubeli Pty Ltd, had taken an assignment of the 2007 Lease over the premises with the consent of the landlord.
Two separate agreements were negotiated between the plaintiff, the defendant and Clubeli Pty Ltd (“Clubeli”). They were both dated 15 April 2010. One was entitled “Service Agreement” and related to the terms on which Mr Carter would provide his services as an executive chef. He did that on a contract basis through the plaintiff. The second agreement was called the “Loan and Services Agreement”. Although so described, it was really only a loan agreement.
Around the time of the opening of the business in September 2009 the plaintiff had provided $130,000 for the purposes of the business, which was treated as a loan to the defendant. In June 2010 the plaintiff provided a further $50,000. Both of these payments were expressly referred to in the Loan and Services Agreement. In April 2011 following the departure of another investor in the business, the plaintiff provided a further $200,000 to the defendant for the purposes of the business. This amount was not the subject of a written agreement. However, by the time of the hearing, it was common ground between the parties that all three of these loans were governed by the terms of the Loan and Services Agreement.
Mr Carter provided his services as an executive chef through the plaintiff until July 2012. At that point, because of the termination or departure of other kitchen staff, he decided that he should leave the business. He gave notice pursuant to the Service Agreement and left three months later. At that point he asked for his money back. The defendant declined to give it to him. The defendant made various offers, which are not necessary to describe in detail, but which did not involve returning the amounts to the plaintiff. Following the expiry of the 2007 Lease on 30 September 2012, the plaintiff contended that it was entitled to have the loan amounts repaid. The defendant’s position was that there was no obligation to repay those loans because the business continued to have a lease of the same premises and that the intention of the parties was that no amount would be repayable until the business either ceased to trade at the premises, was sold or the parties otherwise agreed.
Issues
The issues that need to be resolved in order to settle the controversy between the parties are:
(a)the proper interpretation of clause 4.1(b) of the Loan and Services Agreement;
(b)whether or not an option was exercised within the meaning of clause 4.1(b), so as to lead to the lease which was entered into after the end of the 2007 Lease;
(c)whether or not the Loan and Services Agreement should be rectified so as to only require repayment of the loans under clause 4.1(b) if the lease of the premises was not renewed; and
(d)if the plaintiff obtains a judgment in its favour, how interest up to judgment should be calculated.
In order to resolve these issues it is first necessary to set out some relevant contractual provisions. I will then turn to the issues that I have identified. Because of the way in which the defendant put its arguments it will be necessary to deal with issues (a) and (b) together.
Relevant contractual provisions
In the Loan and Services Agreement, the plaintiff is referred to as “the Contractor” and the defendant is referred to as “Dimitri”. The relevant portions of the agreement are as follows:
WHEREAS
A. CLUBELI has set up a restaurant and bar business at 25 Kennedy Street, Kingston in the Australian Capital Territory which is to commence trading as The Kennedy Room (“the Business).
B. The Contractor has agreed to pay Dimitri the Loan Amount on the basis that Dimitri will advance the sum to CLUBELI for use in the Business.
C. In lieu of interest and in consideration of the Contractor advancing the money to Dimitri the Contractor will provide the Services and CLUBELI will pay to the Contractor a Profit Share upon the terms and conditions of this Agreement.
The parties have agreed:
…
2. DEFINITIONS
In this Agreement unless the context indicates a contrary intention the following expressions shall have the meanings set opposite them:
“Business” means the Business of restaurant and bar trading at 25 Kennedy Street Kingston in the Australian Capital Territory.
…
“Loan Amount” means the amount advanced by each Contractor to Dimitri for use in the Business as set out in item 1 of the Schedule.
…
ADVANCE OF LOAN AMOUNT
3. On or before the execution of this Agreement, the Contractor will advance to Dimitri the sum of the Loan Amount.
4. REPAYMENT OF THE LOAN AMOUNTS
4.1 The Loan Amount is payable by Dimitri to the Contractor on the earliest of the following date:
(a) at any time the Parties agree;
(b) the termination of the Lease of the Business Premises if an option is not exercised; or
(c) on settlement of the sale of the Business.
4.2 Where the Loan Amount is repaid to the Contractor, the Contractor is entitled to its Profit Share accrued up to the date of repayment of the Loan Amount.
4.3 The Lender may at any time before 31 December 2011 advance a further lump sum of $50,000 to Dimitri, from the date of this further advance, the percentage contained in Item 2 of the Schedule will be amended to be 10%.
5. (a) Subject to clause 5(b) whilst the Loan Amount is outstanding, that Contractor is entitled to the Profit Share and the Sale Profit.
(b) Where the Loan Amount is repayable under clause 4.1(c), the Sale Profit is payable irrespective of the date of the repayment of the Loan Amount.
(c) CLUBELI agrees to do all things necessary to prepare its Financial Accounts by 1 October of each year.
…
The Schedule to the agreement is as follows:
SCHEDULE 1
Item 1-Loan Amount
$130,000
Item 2-Profit Share
7.2% payable annually within 28 days of the preparation of CLUBELI’s Financial Accounts.
Issues (a) and (b): The proper interpretation of cl 4.1(b) and whether or not an option was exercised within the meaning of cl 4.1(b) so as to lead to the lease which was entered into after the 2007 Lease
The difference between the parties as to the interpretation of cl 4.1 was whether or not the option referred to in cl 4.1(b) referred to the exercise of the option that existed in the 2007 Lease or whether it extended to a renewal of the lease of the premises not pursuant to that option. The contention of the plaintiff was that it was limited to the option then existing under the 2007 Lease. The contention of the defendant was first, that the option under the 2007 Lease had in fact been exercised but, in the alternative, that the reference to “an option” in cl 4.1(b) extended to the renewal of the lease over the premises even if not in the specific terms contemplated by the option clause in the 2007 Lease. That latter submission was based upon an alleged contractual intention that it would only be once the business ceased to operate at the premises that the loan would become repayable.
Submissions
The plaintiff submitted that cl 4.1(b) focuses on the termination of the 2007 Lease and that moneys would be payable upon the termination of the lease if the option to renew that lease was not exercised. The reference to the exercise of an option was a qualification upon the money becoming payable upon the termination of the lease. The plaintiff pointed to the interpretation contended for by the defendant in paragraph 3(b) of the defence, namely, that “the business … ceased trading from the premises upon termination or non-renewal of the lease”. The plaintiff submits that if cl 4.1 was interpreted in this way it would lead to a situation where a new lease could be entered into other than by the exercise of the option contained in the 2007 Lease and either:
(a)the new lease could contain multiple options which would have the effect of precluding repayment for so long as there remained options to be exercised; or
(b)the new lease could be of a term of any length notwithstanding that the option under the 2007 Lease only contained a single option of five years.
This would have the effect that the borrower would have the capacity to control the term of the loan made by the lender. That capacity would exist in circumstances where the entitlement of the lender was not to interest but a share of profits in lieu of interest. If no profits were being made then there would be no obligation on the borrower to pay anything to the lender.
The plaintiff submitted that the terms “exercise” and “option” are words with commonly understood legal meanings. It pointed to the 14th meaning given in the Macquarie Dictionary to the word “exercise” which is:
to make use of (one’s privileges, powers, etc.): to exercise one’s rights.
It also points to the fourth meaning of “option” which is:
a privilege acquired, as by the payment of a premium or consideration, of demanding, within a specified time, the carrying out of a transaction upon stipulated terms; the right, conferred by an agreement, to buy (or to decline to buy) a property within a certain time.
The plaintiff submitted that, consistently with the statement of the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35], the contract should be interpreted so as to avoid a result which was commercial nonsense or working commercial inconvenience. It submitted that the result outlined in [12] above would amount to commercial nonsense.
The defendant accepted that the reference to an option was to an option under the lease agreement and not some other concept of an option. His submissions were principally directed to the propositions that:
(a)the option in the strict sense reflected in cl 40 of the 2007 Lease had in fact been exercised by a letter dated 4 May 2010; and
(b)in the alternative, the reference to an option should be interpreted as extending to a new lease over the same premises, such as that which was actually entered into.
In support of the latter proposition the defendant pointed to the fact that at an earlier stage prior to the entry into the Loan and Services Agreement the parties had contemplated entry into a partnership. This fact was said to support the interpretation contended for by the defendant because it was indicative of an intention of a long term relationship. The defendant also pointed to the drafting history of the clause. The solicitor for the plaintiff had proposed amendments to the clause to permit (a) repayment of the money on 90 days notice by the lender or (b) repayment of the money at the end of the 2007 Lease. Both of those proposals were rejected by the defendant in favour of maintaining the clause in the form which appears in the agreement. Further, the defendant pointed to some imprecision in the drafting of cl 4.1(b), in particular the fact that the capitalised term “Lease” is not, in fact, a defined term and, while “Business” is defined, the term “Business Premises” is not.
Factual Background
In order to address these arguments is necessary to set out some further factual background relating to the entry into the Loan and Services Agreement and the transactions relating to the entry into the new lease.
In August 2009 the solicitors for the defendant proposed a partnership agreement between Clubeli, the plaintiff and someone called John Paul Rennie. Mr Rennie was another potential investor in the project. The draft partnership agreement that was circulated contained cl 9.1, which related to the repayment of loan amounts and contained paragraphs (a), (b) and (c) in the same terms as the paragraphs of cl 4.1 of the Loan and Services Agreement. The proposal to enter into a partnership was abandoned. The evidence was not definitive as to the reason for that abandonment although it appears to have been because Clubeli was acting in its capacity as the trustee of a trust rather than its own account.
An earlier draft of the Loan and Services Agreement provided by the solicitors for the defendant picked up those same paragraphs and incorporated them into cl 4.1.
On 2 September 2009 there was a meeting between Mr Carter, the defendant and their respective solicitors. At that meeting a document was handed out by the plaintiff’s solicitor which proposed that the plaintiff could terminate the agreement on 90 days notice. That proposal was not agreed to.
I have referred above to the fact that at the same time that the Loan and Services Agreement was entered into, the same parties entered into the Service Agreement. Clause 2.1 of that agreement provided that it commenced on 1 November 2009 and continued for a period of at least six months, extendable after that period on a three monthly basis.
As at the time when the Loan and Services Agreement was entered into, the defendant and the plaintiff were both aware of the terms of the lease that was held by Clubeli over the premises on which the business was to be conducted, that is the 2007 Lease. It had commenced on 1 October 2007 and had a termination date of 30 September 2012. It had been assigned, with the consent of the landlord, by the previous lessee to Clubeli as a result of an agreement dated 25 August 2008. The following aspects of the sublease are relevant:
(a)The area to be included in the lease was described as “Area/Shop/Tenancy 2 & 3 on SL Plan 1437”;
(b)Clause 40 of the lease provided:
40. OPTION TO RENEW
If the Tenant shall desire to take a renewed Lease of the premises for further terms commencing on the dates set out in Item 12 and item 16 respectively on Page 4 and terminating on the dates set out in Item 13 and Item 17 of Page 4 and shall prior to the expiration of the term hereby demised give to the Owner not less than 90 days notice in writing of such desire and if the Tenant during his period of occupation of the premises shall have duly and punctually paid the rent reserved by this Lease at the times herein appointed for payment and shall have duly performed and observed all the covenants and agreements by and on the part of the Tenant contained in this Lease then the Owner will at the cost of the Tenant demise to the Tenant the said Premises for a further term upon and subject to the same covenants and agreements and provisos as are contained in this Lease except the provisions of this Clause
PROVIDED ALWAYS THAT
(i) it is the intention of both the Owner and the Tenant that only two options will be granted over the Premises and it is expressly declared that no perpetuity of option be created.
(ii) the amount of rent and payment of rent for both options, if exercised, shall be as provided for in Items 14, 15, 18 & 19 on pages 4 and 5 respectively and shall become effective as from the date of commencement of the renewed lease
(c)Items 12-19 of the schedule which were referred to in cl 40 were as follows:
Commencement of 1st Option Period
ITEM 12
1 October 2012
Termination of 1st Option Period
ITEM 13
30 September 2017
Annual Rent for 1st Option
ITEM 14
As agreed between the parties
Payment of rent for 1st Option
ITEM 15A
As agreed between the parties
Reviewed Dates & Type for 1st Option
ITEM 15B
On yearly anniversary - CPI
Commencement of 2nd Option Period
ITEM 16
Nil
Termination of 2nd Option Period
ITEM 17
N/A
Annual Rent for 2nd option
ITEM 18
N/A
Payment of Rent for 2nd Option
ITEM 19A
N/A
Review Dates & Type for 2nd Option
ITEM 19B
N/A
I note at this point that it is clear that the 2007 Lease contemplated a single option which, when exercised, would result in a new lease on the same terms as the 2007 Lease, except those relating to the option, from 1 October 2012 until 30 September 2017. The plaintiff pleaded that the option was void for uncertainty because an essential term of the new lease was not specified, namely, rent. However, this argument was not pursued at the hearing.
On 25 September 2009 the solicitors for Clubeli provided a draft Loan and Services Agreement and a draft Service Agreement to the plaintiff’s solicitor.
On 22 December 2009 the plaintiff’s solicitor proposed amendments to the draft Loan and Services Agreement. The amendment proposed was to delete cl 4.1(b) and substitute instead “[blank space] 2012 (being the date of expiry of the initial 5 year Lease term)”. The date intended to be inserted into the blank space was 30 September.
By letter incorrectly dated 18 March 2009 and in fact prepared on 18 March 2010, the solicitors for Clubeli responded globally in relation to all of the amendments proposed to the Loan & Service Agreement as follows:
The Loan and Service agreement we had produced is the same as the Loan and Service agreement our client has subsequently entered into with another investor in relation to the business. We are instructed that both parties are to have the same agreement. The amendments we have made to the previous agreement should deal with most of your client’s concerns. However, we are instructed not to make any further amendments [to] the definition of “Trading Profit” or “Sale Profit”.
There was a greater degree of movement in relation to the terms of the Service Agreement, the amendments to which were dealt with individually, some being agreed to and some not.
On 4 May 2010 the solicitors for Clubeli wrote to the landlord’s agent to confirm the entitlement of Clubeli to use a car park area at the back of the premises. The letter, which forms the basis of the contention that Clubeli did in fact exercise an option, provides as follows:
We confirm our client has agreed that the Lease is hereby varied as follows:
1.That the outside area as per attached plan is included in the Lease for no additional rent;
2.Your client agrees to our client’s renovation of the courtyard upon the condition that no bar is installed in the courtyard and as discussed our client will pay all the costs of the renovation and will indemnify the landlord about all liabilities to the ACT Government arising out of the renovations to the courtyard.
3.The formal documentation in relation to the area of the Lease will be documented on our client’s exercise of the option.
4.The parties have agreed that the water consumption,
whilst the current tenants of the Land remain the same, our client will pay all water consumption above $250.00 incurred on the Land.
Please confirm that the landlord agrees to the proposal by signing the attached letter and return.
The landlord’s agent did in fact sign the letter on 10 May 2010 to indicate agreement to what was in the letter. The letter attached the plan showing the area referred to. The evidence is not clear as to whether the striking through in the letter was done by the solicitor for Clubeli or the landlord’s agent but that is not of any significance for present purposes.
By letter dated 26 March 2012 the landlord’s agent communicated to Clubeli’s solicitor enclosing a letter of intent to lease the premises for a further term. The letter invited the lessee to consider the terms and sign and return the letter of intent. The letter of intent contemplated a further lease commencing on 1 October 2012 for a period of five years with a further option of five years. The letter set out a series of other terms which were to be included in the proposed new lease.
On 28 March 2012 the solicitor for Clubeli wrote to the landlord’s agent, responding to the offer by suggesting amendments including the inclusion of the outside area contemplated in the letter of 4 May 2010 and consequential adjustments to the lettable area.
By letter dated 8 May 2012 the agent responded, indicating that the landlord was happy with the requested amendments. A further letter of intent was provided by letter dated 6 June 2012. That letter of intent made it clear that the rear yard was to be included in the proposed new lease. On 13 June 2012 the defendant signed the letter of intent. On 3 August 2012 the solicitors for the landlord sent to the solicitors for Clubeli the proposed draft lease in duplicate. There was then some negotiation of minor changes to the terms of the proposed lease. Ultimately the new lease was entered into with the landlord although the evidence does not disclose the date when that occurred. The new lease commenced on 1 October 2012, the day after the expiry of the 2007 Lease. The terms of the new lease were not drafted with the avoidance of prolixity in mind. They extended over some 75 pages of small font text, making the earlier lease, which extended over a mere 21 pages, appear to be a work of commendable economy and brevity.
Consideration
In the light of this history I do not accept the submission made on behalf of the defendant that the letter of 4 May 2010 constituted the exercise of the option. That letter was dealing with how the additional area should be treated. It was a document intended to preclude any argument as to the entitlement of Clubeli to use the yard area during the period of the lease. It clearly proceeded on the basis that a formal revision of the lease was not necessary. It contemplated that if the option was exercised in the future then the lease would be amended to incorporate that additional area. In treating the matter in that way, it did not itself amount to the notice required under cl 40 of the lease. It was not sufficient to have contractually compelled the landlord to grant a new lease.
Even if it did constitute the notice required under cl 40 then in my view the exercise of the option required more than merely the giving of notice. That is because for the purposes of the option the lease was to be “subject to the same covenants and agreements and provisos as are contained in this Lease except the provisions of this Clause”. In order for the option to have been exercised not only must the notice have been given but the lease must be granted in accordance with the terms of the option. Having regard to the terms of the new lease I am not satisfied this was the case. Therefore, I reject the submission of the defendant set out at [17](a) above that the option under cl 40 of the 2007 Lease was in fact exercised.
Consistently with this approach I reject the submission of the defendant that the granting of a new lease at the end of the 2007 Lease was sufficient to constitute “an option” being exercised for the purposes of cl 4.1(b). An option is a specific concept. In the present case both parties to the contract were aware of the existence of an option pursuant to the existing lease. There is a significant difference between the exercise of an option and the grant of a new lease on different terms. Unless the terms of the new lease are those contemplated by the option described in the 2007 Lease, there is no identifiable limit on the scope of the amendment of the terms of the lease that could be made. Of particular relevance in the present case, there would be no limit on the term of the lease that might be entered into or the number of options that might be contemplated. In my view such an interpretation is inconsistent with the actual words used in cl 4.1(b) and would lead to a commercially absurd result. As a consequence, notwithstanding that the new lease was negotiated “in the shadow” of the existence of the option in the 2007 Lease, the entry into the new lease did not amount to the exercise of an option for the purposes of cl 4.1(b).
Issue (c): Whether or not the Loan and Services Agreement should be rectified so as to only require repayment under cl 4.1(b) if the lease of the premises was not renewed
In relation to rectification, the defendant claimed in his counterclaim that:
the common intention of the parties in entering into the Loan & Services Agreement was that clause 4.1 should have the effect that the plaintiff would be entitled to repayment of the loan if the business was sold or ceased trading from the premises upon termination or non-renewal of the lease or at such earlier time as the parties may agree.
As a consequence the defendant sought rectification of cl 4.1(b) by replacing the words “if an option is not exercised” with the words “if the Lease is not renewed”.
The effect of this would be that cl 4.1(b) would read “the termination of the Lease of the Business Premises if the Lease is not renewed”.
The general principles applicable to rectification are provided in the decision of Master Harper in Scald Pty Ltd v Turner Developments Proprietary Ltd [2014] ACTSC 72 at [132]-[139]. In the present case the evidence goes nowhere near to establishing that the written contract fails to give expression to the true intention of the parties.
What, in fact, the evidence does demonstrate is that the only thing that was agreed upon by the parties were the actual words used in the contract. It is clear that the plaintiff endeavoured to achieve maximum flexibility in relation to his investment by first proposing that the loan be recoverable on 90 days notice and then, when that proposal was rejected, suggesting that it be recoverable after the end of the 2007 Lease. That proposal was also rejected on the grounds that Clubeli wished to maintain consistency between agreements entered into by Clubeli, there being another document in the same terms entered into with another investor, Mile Kadinski. The evidence did not support the proposition that both parties intended that cl 4.1(b) would only require the repayment of the loans when the business ceased to operate at the premises. Clearly, at the point of entry into the agreement both parties intended that their venture be successful and that their working relationship be maintained. However, that general intention is not enough to support a finding that their agreement was anything other than the actual words used. Rather, the negotiations between the parties emphasise the fact that the agreement reached was that which was recorded in the words of the Loan and Services Agreement.
I therefore refuse to make an order rectifying the Loan and Services Agreement in the manner sought by the defendant.
Issue (d): If the plaintiff obtains judgment in its favour how interest up to judgement should be calculated
The parties were in agreement that since the end of the 2007 Lease, the defendant has continued to pay the share of the profits required to be paid pursuant to the Loan and Services Agreement. In the light of my conclusions above, the defendant was obliged to repay the loan amounts on 30 September 2012, when the 2007 Lease came to an end. The plaintiff submitted that for the purposes of calculating interest it would be appropriate to treat the payments received since that date as repayments of principle rather than treating them as interest. The plaintiff accepted that an alternative method of dealing with those payments was simply to set those payments off against interest that would otherwise be payable. The latter course has the attraction of mathematical simplicity although if done as a simple set off it incorporates an element of inaccuracy because of the different dates at which payments would have been received.
There were no evidence or submissions put forward in support of the proposition that interest should not be awarded for the whole of the relevant period from the end of the 2007 Lease.
Therefore, I will award interest at the rate identified under the Court Procedures Rules2006 (ACT) from time to time from 1 October 2012 until the date of the making of final orders treating payments made as repayments of principal. Having regard to the absence of evidence about precisely what payments on account of a share of profits have been made and the calculations required if they are treated as repayments of principle, I will hear the parties further in relation to the calculation of interest and the terms of the final orders that should be made.
Orders
The orders of the Court are:
1. The proceedings are listed on 19 December 2014 at 12 noon for the making of final orders including any orders relating to interest and costs.
2. The parties are directed to consult with each other and bring in agreed or competing short minutes to give effect to these reasons.
| I certify that the preceding forty-seven [47] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Master Mossop. Associate: Date: 18 December 2014 |
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Amendments:
18 December 2014 Remove the words “for further” from Order 1 Paragraph(s): [47]
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