Oaktech Pty Ltd (T/a Eureka Garages & Sheds) v Legion Heights Pty Ltd (T/a A M Machinery) & Anor
[2008] VSCA 145
•18 August 2008
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 375 of 2007
| OAKTECH PTY LTD (trading as EUREKA GARAGES & SHEDS) | Appellant |
| v | |
| LEGION HEIGHTS PTY LTD (trading as A M MACHINERY) and ALFRED MOLLISON | Respondents |
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JUDGES: | REDLICH JA and MANDIE and PAGONE AJJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 29 July 2008 | |
DATE OF JUDGMENT: | 18 August 2008 | |
MEDIUM NEUTRAL CITATION: | [2008] VSCA 145 | |
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CONTRACT LAW – Sale of laser cutting machine to be installed and commissioned – Fitness for purpose – Representations and warranties – Rescission.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr D J Williams | Davis Zucco & Co |
| For the Respondents | Mr J H Kennon SC with Mr R M J Lombardi | Hassall & Byrne |
REDLICH JA:
I have had the opportunity of reading in draft the reasons of Pagone AJA and agree for those reasons that the appeal should be dismissed. I would add only these observations.
As to grounds 4, 5 and 6 (the pre-piercing issue), it is evident from the course of the trial and the pleadings[1] that there was no reference at trial as to what the parties understood or intended by the stipulation that the machine have the capacity to ‘pre-pierce’[2]. The appellant relied on appeal on the fact that the machine’s ability to ‘pre-pierce’ had been pleaded as a ‘relevant purpose.’ It further relied upon the fact that the appellant’s understanding of that term as explained in the witness statement of Mr Sabatino had not been challenged at trial. But it was not suggested at trial that the pre-contract negotiations or the contract were concerned with any distinction between ‘blow’ and ‘pulse’ pre-piercing. Nor was it claimed that Mr Sabatino had conveyed his understanding of the term to the respondent at a material time. The question explored at trial was whether the machine could do so. It was not disputed that at the inspection of the machine in 2005 it was ‘pulse’ pre-piercing. The trial judge was correct in his conclusion that the machine could ‘pre-pierce’.
[1]Para 6(f)(ii); Para 7; Para 8 (f); Para 11 (d) (vi) B; 11(e)(vii) Counter Claim.
[2]This is acknowledged in the appellant’s supplementary submission of 14th August 2008 [3].
I also agree with Pagone AJA that the appellant’s insistence that the respondent or manufacturer provide a written outline of the work they intended to perform before permitting any further inspection of the machine was unreasonable. The trial judge was entirely justified to conclude as he did. As a consequence of the position adopted by the appellant, the respondent and the manufacturer were denied the ability to assess whether the defects alleged by the appellant and raised under grounds 7, 8, 9 and 10 were defects for which the respondent was responsible or whether they were due to operator error. The obduracy of the appellant also contributed to the circumstances which precluded the trial judge from reaching any
conclusion that the absence of an interlocking guard (ground 1) or the possible presence of other alleged defects in the machine could support a claim sounding in damages beyond those he awarded.
MANDIE A JA:
I have had the benefit of reading in draft the reasons of Pagone AJA and I agree that the appeal should be dismissed for the reasons stated by him. I also agree with the additional observations of Redlich JA.
In relation to the pre-piercing issue, I would add that the appellant did not plead that it was an express term of the agreement that the laser cutting machine would be capable of pre-piercing the materials to be cut. Nor did the appellant plead that the respondent had made any express representation or warranty to that effect. The appellant did plead that it had made known to the respondent the particular purposes for which the machine was being acquired, including ‘to be able to laser cut steel and other materials … efficiently and with minimal wastage, including … pre-piercing of materials to be cut.’ On that basis, the appellant alleged an implied term of reasonable fitness for purpose and that, inter alia, that term was breached because the machine could not be used to laser cut steel and other materials efficiently and with minimal wastage, including pre-piercing of materials to be cut. However, the evidence given by the appellant’s director, Mr Sabatino, in his witness statement, concerning what the appellant had made known to the respondent, was in truth inadmissible – all that Mr Sabatino said was that ‘[o]ne of the features of the machine which had been promised to me was that it could “pre-pierce”.’ Other than that, there was no evidence at all of the relevant conversation and no other evidence of what the appellant had made known to the respondent in that regard. As the learned trial judge noted in his reasons, Mr Sabatino ‘was not asked to elaborate on this’. Nor was there any, or any satisfactory, evidence as to what either party understood at the relevant time by that alleged promise. Accordingly, the learned trial judge was entitled to reach the conclusion that he did on this topic.
PAGONE AJA:
Oaktech Pty Ltd (‘Oaktech’) seeks to appeal from the whole of the orders made by the learned trial judge on 5 March 2007. Fourteen grounds of appeal are relied upon although some overlap. All grounds of appeal challenge the trial judge’s
findings of fact on the evidence.
The dispute between the parties concerned the performance of a laser machine purchased by Oaktech from Legion Heights Pty Ltd, trading as A M Machinery, (‘Legion’). In December 2003, Legion agreed with Oaktech for the former to supply, install and commission a two kilowatt laser cutting machine for $400,000 plus GST. The machine was manufactured by a Taiwanese company called Favor Laser Inc (‘Favor’). The terms of payment were for 90% on delivery and 10% on commissioning. The directors and shareholders of Legion are Alfred Mollison and his wife, Kaylene Mollison. Oaktech is owned by Dominic Sabatino who is the sole director and shareholder of the company. Oaktech trades as Eureka Garages and Sheds.
The laser cutting machine was installed by employees of Favor at Oaktech’s premises in January 2004. Mr Sabatino experienced difficulties in using the machine from its installation. Mr Mollison and Favor attempted to resolve the problems but Mr Sabatino eventually adopted the position that he would not permit Favor personnel to attend at Oaktech’s factory and in April 2004 purported to rescind the contract and required Legion to take back the laser machine. After further attempts to resolve the disputes between the parties, Legion commenced proceedings in the Magistrates’ Court to recover the unpaid balance of $40,000 to which Oaktech responded with a very much larger counterclaim leading to the proceeding being transferred to the Supreme Court. Oaktech’s counterclaim sought damages assessed on various bases. The claim was put in different ways but, essentially, was based upon the proposition that the laser machine was not fit for the purpose for which it was sold and did not conform with representations and warranties which had been made about it. The learned trial judge essentially found against Oaktech on all bases except that the laser machine did not comply with certain safety standards and awarded the relatively small sum of $10,000 by way of damages.
The pre-piercing issue (Grounds 4, 5 and 6)
A significant issue in the appeal was whether the machine was capable of ‘pre‑piercing’ as it was said to have been understood by the parties at the time of contract. Oaktech’s point, on appeal, was that the parties had understood the term ‘pre‑piercing’ to have a particular meaning at the time of the contract and that his Honour should have found accordingly, with the consequence that the machine, as supplied, should have been found not to have been fit for its intended purpose because it was not able to pre‑pierce in the way it was said to have been understood by the parties at the time of contract.
The relevance of any difference in meaning to the term ‘pre‑piercing’ arose late in the course of the trial. No distinction was made in the pleadings or by the parties prior to trial about any difference in meaning the word may have. Legion gave evidence first (as the plaintiff) and no point had been made at any stage during Legion’s case about the different meaning the word was capable of bearing. Nothing appears to have been made of the distinction during any part of Legion’s case or, it seems, during the evidence of Mr Sabatino. It appears that any potential difference in meaning only arose during the evidence of a Mr Higginson and that of a Mr Mitin late in the trial.
It appears that pre‑piercing can mean either blow piercing or pulse piercing. The former is undertaken at high power and is much faster than pulse piercing. The evidence of Mr Mitin and Mr Higginson was, as the learned trial judge found, that contract cutting of large metal sheets needs to be done by blow piercing because of the time saved. Mr Higginson went so far as to regard pulse piercing as not being pre‑piercing at all. Mr Mitin’s evidence was to the same effect.
In fact the laser machine is capable of doing both pulse piercing and blow piercing although the latter is not recommended by Favor because of what is referred to as ‘splatter’ of molten material during the piercing phase. The evidence of Mr Sabatino in the witness statement concerning the meaning of ‘pre‑piercing’ suggested an understanding of the process at the time of the preparation of the witness statement as blow piercing. However, his witness statement does not suggest an understanding of any other meaning of blow piercing or any consciousness that pre‑piercing had alternative meanings. Nothing in the relevant parts of the witness statement of Mr Sabatino suggested that a particular meaning of pre‑piercing had been contemplated by the parties prior to or at contract. His evidence in the witness statement was essentially that he had been promised that the machine could ‘pre‑pierce’ and, as he contended, that the machine could not do so. In fact the machine, as the learned trial judge found, can pre‑pierce and Mr Sabatino gave no evidence, and no other evidence was led on behalf of Oaktech, that the parties had a particular understanding of pre‑piercing at the time of contracting that was in any way different from what the machine could actually do.
Mr Mollison was cross‑examined about the machine’s ability to pre‑pierce. It was not put to him that any particular meaning of pre‑piercing was specifically in contemplation by the parties prior to and at the point of contract in late December 2003 and early 2004. His evidence was, rather, that the machine could pre‑pierce in fact. More particularly it was that what this machine could do, and which he had seen it do, was his understanding of pre‑piercing. It is true that his cross‑examination talked about pre‑piercing material using ‘the maximum wattage’ but no part of his evidence in cross‑examination was directed to any understanding or representation to Mr Sabatino and Legion concerning a particular form of pre‑piercing different from what the particular machine was in fact able to do.
There was, therefore, no direct evidence before the learned trial judge concerning the parties’ understanding of the meaning of ‘pre‑piercing’ prior to, at and forming part of the contract. It appears that no specific argument was put to his Honour about the understanding of the parties about pre‑piercing prior to, at and forming part of the contract in the way in which it came to be developed in the appeal. It could not fairly be said that the learned trial judge erred in making no finding about what the parties may have meant at the time of contract in those circumstances. The evidence, such as it is, does not establish sufficiently any secure foundation for a conclusion that the parties had a settled understanding of pre‑piercing as blow piercing as Oaktech contended.
His Honour correctly found on the evidence that the machine was capable of pre‑piercing in both senses albeit that the manufacturer of this machine did not recommend blow piercing. The evidence of Mr Higginson and Mr Mitin about the importance that a machine be able to do pre‑piercing in the sense of blow piercing for commercial reasons is not sufficient on the evidence to establish a settled understanding between the contracting parties. The evidence about the importance of blow piercing was for contract cutting which, on the evidence, appears to have been more a matter for development of Oaktech’s business rather than central to its business activities at the time of contract. No specific requirements or specifications were made known to Legion about Oaktech’s requirements and, as was the fact, the laser machine sold was in fact capable of pre‑piercing. Blow piercing may be faster than pulse piercing but no evidence was led sufficient to establish that the piercing which the machine is capable of doing was insufficient for the primary purpose of cutting metal sheets in Oaktech’s business. The specific complaint that his Honour could not have found (Ground 6) that using pulse piercing ‘still saves time when compared with doing no pre‑piercing at all’ was open to his Honour as natural inferences flowing from the evidence. The evidence of pre‑piercing itself was that the time saved arose from pre‑piercing the hole for each shape to be cut. The reason for doing any pre‑piercing (of whatever kind) was to save operation time.
Non‑compliance with safety regulations (Ground 1)
Oaktech complained that the trial judge should have held that Oaktech was entitled to rescind the contract by reason of his finding that the laser machine, as supplied, did not comply with the relevant safety requirements and standards. Legion did not contest that the machine failed to comply with relevant safety standards. It was common ground at the time of the trial and on appeal that the laser machine supplied did not provide for an adequate integrated guard to protect against injury. The machine it seems was guarded with a hinge‑type guard about 900mm by about 600mm. The problem was that the guard could be opened during the machine’s operation giving rise to the possibility of risk to people getting close to the machine during its operation. The learned trial judge concluded that this non‑compliance did not entitle Oaktech to rescind the agreement at common law or under statute. Critical to the learned judge’s conclusion was his finding that the matter was readily able to be dealt with at relatively low cost and that it would have been rectified had it not been for ‘Sabatino’s attitude’.
The correspondence between Oaktech and Legion suggests that the failure of the machine to comply with the relevant safety standards was not the principal reason leading to the purported rescission. Mr Sabatino wrote to Mr Mollison on 10 March 2004 setting out concerns about the machine saying:
Please note I need firm commitment in writing addressing when and how all issues will be dealt with to my satisfaction, if this cannot be done I will consider the sale cancelled and money including interest refunded.
The possibility that the machine might not have complied with the safety regulations was not a matter mentioned in the letter or in any of the correspondence before then. Mr Sabatino’s assertion that he would consider the sale cancelled was not, as at that date, made to depend upon any concern that the machine might not comply with safety regulations. Nearly two weeks later he wrote again listing nine items to be dealt with of which the sixth was described as ‘verification’ that the machine complied with the relevant safety standards including those relating to the safeguarding of machinery. The letter did not claim that the machine did not satisfy the regulations: it was, rather, a requirement of verification that it did. That letter went on to reaffirm the intention to cancel the contract which he expressed in the previous letter. Mr Sabatino did not identify any way in which the regulations had not been complied with at the point at which he sought to rescind the contract.
On 2 April 2004 Mr Sabatino adopted a position which was that he would not allow any work to be done on the machine unless he was told ‘in writing how each and every issue [was] to be addressed with the final outcome before any work can be started’. Legion’s response was that Favor would attend to address the issues and complaints which Mr Sabatino had identified. At no stage did Legion or Favor ever refuse to undertake whatever rectification or compliance work was required, although as at 13 April 2004 (and it seems for some time until prior to the trial) they had genuinely believed that the machine did comply with the relevant regulations concerning the guarding. Mr Sabatino, however, steadfastly maintained his position that no work was to be done on the machine unless all issues he had previously identified were ‘suitably addressed in writing to [his] satisfaction’.
His Honour correctly concluded that this defect was not sufficient to justify rescission. Whether Oaktech had a right of termination by reason of non‑compliance with the safety regulations depends upon the construction of the terms of the contract and whether the term is to be regarded as a fundamental condition. The adequacy of damages may be an indication that a term was not intended by the parties to be a condition.[3] Similarly, the achievement of an unreasonable result by the construction of a term as a condition may point to an intention that the parties did not treat the term as a condition.[4]
[3]Friedlander v Bank of Australasia (1909) 8 CLR 85, 96 (Griffith CJ).
[4]L. Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 62 where Upjohn LJ said that it would have been ‘contrary to common sense’ to construe the seaworthiness term as a condition.
In this case a Mr Toseland gave evidence that the machine could be made to comply with the regulations in one of two ways. One way was to provide for an electrical interlocking device which would have the effect of turning off the machine once the guard was opened. An alternative mechanism was to secure the guard so that it could only be removed by the use of a specifically designed tool. The evidence of a Mr Beavis was that the work needed to ensure compliance with the relevant safety standards could be done for a cost of $6,275 plus GST. A Mr Ladley estimated the cost at no more than $10,000. Mr Toseland (who was an inspector from WorkSafe) suggested a ‘ball park’ figure of $5,000 to undertake the work he had described.
His Honour was correct to conclude on the evidence that the non‑compliance with the safety regulations did not permit rescission of the contract. The machine cost $400,000 plus GST and the rectification here could be fixed for a sum of no more than $10,000. It could not have been in the contemplation of the parties that the buyer could terminate in those circumstances. The contract, as pleaded, was for Legion ‘to supply, install and commission’ the laser cutting machine. The work needing to be done to ensure compliance with the safety standards was something to be secured as part of commissioning and whichever the methods suggested by Mr Toseland might be adopted to secure compliance required an inspection of the machine. Mr Sabatino, however, made that impossible.
Legion also sought to support his Honour’s conclusion (that any breach of the safety requirement) sounded in damages by reliance upon s 16(3) of the Goods Act 1958. That section restricts a buyer to an action for breach of warranty (and not as a ground for rejecting the goods and treating the contract as repudiated unless there is an express term to that effect) where, amongst other probabilities, the property in the goods had passed to the buyer. Legion was given leave in the appeal to rely upon this additional ground to support the decision of the learned trial judge and it does so.
The need to split programs (Grounds 2 and 3)
The issue concerning the need to ‘split’ the program concerned the ability of the laser machine to cut metal parts in a continuous process without the need for human intervention. The laser machine had been purchased by Oaktech for use in its own manufacturing operations and, additionally, to establish a business of contract laser cutting of metal parts for other customers. The evidence of Mr Sabatino and Mr Mitin (the proprietor of an established contract laser cutting business) was that an effective contract laser cutting business requires that the laser machine have an ability efficiently to ‘nest’ and to cut a variety of different, that is irregular, metal parts from a single sheet of metal. In this context ‘nesting’ means the arrangement of the parts to be cut across the plate in a way which most efficiently uses the maximum amount of the metal and results in the minimum amount of wastage. Nesting is done by a computer program which determines the most efficient arrangement of the material to be cut and directs the laser machine to cut in that way by transmission of computer messages.
The critical issue was whether the laser machine could nest irregular parts and then cut a full sheet of irregular parts into a single automated process, or whether it was necessary to split the program into two or more in order to execute that process. The learned trial judge held that the machine could not nest and cut a full sheet of irregular parts in a single automated process and that in order to cut such a sheet it would be necessary to split the computer nesting program running two or more programs sequentially and, therefore, requiring human intervention after the computer had determined the program to be nested. In other words, the computer first determined the best method for cutting the sheet and that method was then adopted by human intervention splitting the task for the operation of the laser machine. His Honour went on to conclude that this did not make the program unfit for the purpose for which it had been sold.
Oaktech had never alleged that Mr Mollison had represented to Mr Sabatino that he would never need to split a program. Rather, what was pleaded, was that Mr Mollison had represented that the machine had ‘practically unlimited memory’. The learned trial judge, however, found that he could not be satisfied on the evidence that Mr Mollison had made such a statement but that, even if it had been made, the ‘memory problem’ of the laser machine itself could be solved by splitting the computer generated program in a manner which was quick and easy to do. These findings were plainly open to him on the evidence and no deficiency was demonstrated in his Honour reaching those conclusions.
Oaktech complained about the learned trial judge not having acted on the evidence of Mr Mitin to the effect that the need to split programs meant that the machine was unsuitable to the proposed contract cutting business. Mr Mitin’s evidence, however, was based largely upon quite a different machine costing double that in question. It was to be contrasted with that of Mr Lai who gave evidence that in practice contract cutters throughout the world would need to split programs from time to time.
Machine failing to hold a ‘pause’ (Grounds 7 and 8) and loss of focal point (Ground 10)
Grounds 7, 8 and 10 each complain about the learned trial judge’s not upholding specific allegations which had been made by Oaktech. Grounds 7 and 8 concern an allegation that the machine was unable to maintain a pause; that is, that the machine failed to remain on ‘pause’ mode. Mr Sabatino had given evidence‑in‑chief concerning an incident which he said occurred as alleged. Ground 10 concerned an allegation that the machine suffered a decline in cutting head focussing accuracy during the heat of summer. Mr Sabatino had again given evidence that the machine had suffered a decline in accuracy during summer in early 2004.
In the case of each of these allegations there was evidence upon which the learned trial judge was able to find as he did. The machine was inspected by experts for the purposes of the trial who gave evidence about the state of the machine. Mr Higginson (Mr Sabatino’s expert witness) said that the machine could hold a pause and that he had seen no failure of the machine to do so. Both experts agreed that the failure to calibrate the nozzle by the operator could result in the nozzle crashing into the metal plate. Mr Lai gave evidence that it takes an operator three to four months to become skilled at using the machine and Eric Lai said that Mr Sabatino had not dedicated enough time to training. The learned trial judge’s finding was that the one isolated event of the machine not holding a pause did not amount to a defect in the machine; that is, that the one event described by Mr Sabatino did not establish a failure to hold a pause. The same was true in relation to the complaint concerning the loss of focal point in hot weather. The learned trial judge again said that he had not been satisfied on the balance of probabilities that the machine did not maintain a proper focal point for laser cutting. This finding was open to the judge after hearing all of the witnesses including the expert witnesses. The laser machine in question required manual calibration when changing nozzles by a trained operator. Mr Higginson gave evidence that the laser machine should maintain a proper focal point if an operator was skilled and did a proper manual adjustment of the focal point.
Full line gas pressure fault (Ground 9)
The learned trial judge’s conclusion in respect of Ground 9 (that is, the complaint concerning the four line gas pressure fault) was in a somewhat different category. In this case the problem complained of was that the laser machine appeared to suffer from intermittent self‑activation of full‑line gas pressure. Mr Sabatino had given evidence of this fault and the learned trial judge accepted that the problem occurred as Mr Sabatino had described. His Honour, however, did not find a cause of the problem. Oaktech’s expert witness, Mr Higginson, had said that he did not believe it to have been a problem because when he checked it the gas pressure did not intermittently self‑activate. His Honour said:
It is impossible to say what caused the problem. It may have been caused by a defective part (say, in the regulator) outside the manufacturer’s responsibility, or it may have been something the manufacturer was obliged to fix. In any event, it was necessary for the Favor Laser engineers to see the machine in order to diagnose the problem.
Oaktech complains about what it says was speculation by his Honour. The speculation, however, is only indicative of his Honour’s decision that the cause of the problem had not been established. An acceptance of events having occurred as Mr Sabatino contended (and accepted by the learned trial judge) does not necessarily bring with it the conclusion of acceptance that the cause of the problem was something for which Legion was responsible. His Honour is fairly to be read as saying no more than that Oaktech had failed to establish the cause; that is, that Oaktech had established evidence of an event but had not established its cause as a defect in the machine.
Reasonableness of the appellant’s insistence of a written plan of attack to resolve the impasse over an inspection (Grounds 11 and 12)
Grounds 11 and 12 both refer to the impasse between the parties which commenced around late 2004 in relation to whether or not Oaktech should have permitted an inspection of the machine by the manufacturer’s Taiwanese technical staff without first being provided by Legion with a written plan outlining the work which they intended to perform. This matter was referred to by his Honour in several passages and has been referred to above. His Honour was entitled to form the view he did on the evidence available to him. Mr Sabatino sought unilaterally to impose a requirement which he had no right to impose. He was informed in writing that the manufacturer was prepared to send technicians from Taiwan to Australia to attend to the problems he had identified. A fair reading of such a response was that his unilaterally imposed requirement had been satisfied, that is, that he was told ‘in writing how each and every issue [was] to be addressed’ in the sense that he was being told that trained personnel were to travel from Taiwan to Australia who would do whatever was required to be done in order to fix the problems which had been identified. However, the imposition of such a requirement as that which he imposed, and an insistence that it be satisfied with greater specificity and detail, was manifestly unreasonable in circumstances where the technicians of the manufacturer of the machine had clearly expressed a willingness to travel the distance without cost to Oaktech for the purpose of fixing whatever needed to be fixed. Oaktech’s position through Mr Sabatino was not productive in any way of a resolution of the problem. That is to say, that the requirement imposed by Mr Sabatino did not in any way, and was in no way calculated, to remedy the problem. His position, and his requirements, were not designed or likely to remedy the problems and had as their only purpose and effect that of preventing their resolution.
The machine was never fully commissioned (Grounds 13 and 14)
Ground 13 in the appeal was that the learned trial judge erred in that he found that the laser machine had not been fully commissioned or, at least, that his Honour erred in finding that the machine had been fully commissioned in so far as his Honour may have made such a finding. Ground 14 was described as a logical corollary to Ground 13, namely, that as a consequence of the alleged error identified in Ground 13, the learned trial judge erred in finding that Legion was entitled to payment of the sum of $40,000 being the final instalment of the purchase price of the machine which was payable on commissioning.
Three facts were relied upon in support of Ground 13. The first was that the machine was inappropriately installed across two concrete slabs. The second was the non‑compliance with safety standards to which reference has already been made and, the third was described as a succession of breakdowns and faults commencing from the time of installation.
The learned trial judge found that the machine had been commissioned on 16 January 2004. On the evidence this finding was open to him notwithstanding the possibility of the three defects on which Oaktech relied. None of them establish that the laser machine was not commissioned.
Accordingly the appeal should be dismissed with costs.
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