Yuanda Australia Pty Ltd v John Holland Pty Ltd
[2015] WASC 453
•25 NOVEMBER 2015
YUANDA AUSTRALIA PTY LTD -v- JOHN HOLLAND PTY LTD [2015] WASC 453
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2015] WASC 453 | |
| 25/11/2015 | |||
| Case No: | CIV:2854/2015 | 23 NOVEMBER 2015 | |
| Coram: | MITCHELL J | 24/11/15 | |
| 15 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | YUANDA AUSTRALIA PTY LTD JOHN HOLLAND PTY LTD |
Catchwords: | Practice and procedure Application for mandatory interlocutory injunction Where plaintiff seeks repayment of funds drawn down pursuant to bank guarantee shortly before grant of interlocutory injunction |
Legislation: | Nil |
Case References: | Best Tech & Engineering Ltd v Samsung C&T Corporation [No 2] [2015] WASC 447 JTA Le Roux Pty Ltd v Lawson [No 2] [2013] WASC 373 Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
JOHN HOLLAND PTY LTD
Defendant
Catchwords:
Practice and procedure - Application for mandatory interlocutory injunction - Where plaintiff seeks repayment of funds drawn down pursuant to bank guarantee shortly before grant of interlocutory injunction
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff : Ms K J Levy
Defendant : Mr S J Davis
Solicitors:
Plaintiff : Gadens Lawyers
Defendant : Clyde & Co
Case(s) referred to in judgment(s):
Best Tech & Engineering Ltd v Samsung C&T Corporation [No 2] [2015] WASC 447
JTA Le Roux Pty Ltd v Lawson [No 2] [2013] WASC 373
Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98
- MITCHELL J:
(This judgment was delivered extemporaneously and has been edited from the court's record of the decision.)
1 The plaintiff applies for a mandatory injunction requiring the defendant to repay the Industrial and Commercial Bank of China Ltd (ICBC) the sum of $3,320,000, on the reinstatement of bank guarantees which the defendant converted to cash on 18 November 2015. In the interim, the plaintiff seeks an order requiring the defendant to pay that sum into court.
The relevant disputes
2 The plaintiff and defendant are in dispute in relation to work performed and payment due under a subcontract which they entered into in relation to façade works for the New Children's Hospital in Perth. The Hospital is being constructed by the defendant for the State under a head contract. The subcontract provides for the plaintiff to perform works related to the design and installation of the façade to the hospital. I shall refer to the subcontract as the 'contract' in the balance of these reasons.
3 Clause 4.1(a) of the contract requires the plaintiff to provide security for performance of its obligations under the contract, which may be an approved security in the form of a bank guarantee. Clause 4.1(b) provides:
[The defendant] is entitled to convert the security into cash at any time and may utilise the security to pay for any costs, expenses or damages which [the defendant] claims that it has incurred or might in the future incur as a consequence of any act or omission of the [plaintiff] which [the defendant] asserts constitutes a breach of the Subcontract.
4 The security contemplated by cl 4.1(a) was provided by way of two unconditional bank guarantees provided by ICBC, each in the sum of $1,660,000. The bank's undertaking in each case is to pay the sum on demand without reference to the plaintiff. I infer that this form of bank guarantee is consistent with that provided for in the contract.
5 Disputes have arisen under the contract in relation to alleged defects in vitreous enamel (VE) panels which form part of the building's façade. The defendant alleges that a significant number of the panels are defective and require replacement, and that the cost of doing this will exceed the value of the bank guarantees. In addition, the defendant claims that it is entitled to payment of nearly $4 million in liquidated damages by reason of delay in completion of the works. The court is obviously not in a position to resolve those disputes at this interlocutory stage.
Conversion of the bank guarantees to cash
6 On 20 May 2015, the defendant wrote to the plaintiff foreshadowing their intention to call on the bank guarantees to cover the repair costs of the VE panels. On 9 November 2015, the plaintiff wrote to the defendant requesting that the defendant give an undertaking to provide seven days' notice before calling on the bank guarantees. On 10 November 2015, the defendant refused to give the undertaking sought.
7 Most of the following events occurred in Sydney. It is therefore convenient to refer to the times at which events occurred in Australian Eastern Daylight Time, except where otherwise indicated.
8 At 11.00 am on 17 November 2015, a representative of the defendant attended the Sydney branch of the ICBC and presented the bank guarantees with a demand for payment. Over the course of the day discussions ensued with ICBC as to whether payment should be made immediately and without reference to the plaintiff.
9 At 1.00 pm on 17 November 2015, an officer of the plaintiff called an officer of the defendant and said 'I know what is going on' and 'I have just decided to leave it with the lawyers'. In consequence, at 1.47 pm, the defendant's solicitors wrote to the plaintiff's solicitors indicating that, if the plaintiff intended to make an injunction application, the plaintiff should provide the defendant with notice of the application, which would be opposed.
10 At 8.16 pm on 17 November 2015, the plaintiff's solicitor sent an email to the defendant's solicitor advising that an injunction would be sought the next day restraining the defendant from completing its call on the bank guarantees.
11 At 10.04 am on 18 November 2015 the defendant's solicitor advised the plaintiff's solicitor that the defendant would not give any undertaking not to complete its call on the bank guarantees.
12 At 10.50 am on 18 November 2015, the defendant's representative collected two bank cheques, each in the amount of $1,660,000, from ICBC's Sydney branch. At 11.15 am those two cheques, totalling $3,320,000, were deposited into the defendant's bank account at the Commonwealth Bank in Sydney.
13 At the time of the deposit of the cheques in the defendant's bank account, it was only 8.15 am in Perth. The Perth registry of the Supreme Court was not open at that time. The plaintiff's solicitors did not take any steps to seek an injunction, outside of normal court hours, from the duty judge. I therefore infer that the application for injunctive relief was not filed at the time of the deposit of the cheques.
14 At some time on 18 November 2015, the plaintiff filed a writ in this court seeking injunctive relief and damages and a chamber summons seeking an interim injunction. At 1.38 pm on 18 November 2015, the defendant's solicitors were advised of the application and documents relating to it were served by email. At 2.03 pm on 18 November 2015, the defendant's solicitors were advised that the injunction had been granted.
15 The injunction, which was granted by Master Sanderson, restrained the defendant from taking any step, or any further step, to exercise its rights under cl 4.1 of the contract. The injunction operated until after judgment in the action or further order, and gave liberty to apply on 24 hours' notice.
16 It appears from the above chronology that the conversion of the bank guarantees into cash, in the purported exercise of rights under cl 4.1 of the contract, was completed before these proceedings were commenced. The defendant accepts that the injunction, while it remains on foot, prevents it from utilising the cash obtained to pay costs, expenses or damages under cl 4.1 of the contract.
17 The plaintiff submits that the defendant engaged in sharp practice by taking advantage of the time difference between Sydney and Perth to convert the bank guarantees into cash. The plaintiff contends that the defendant did so in the time between being notified of the proposed injunction application at 8.16 pm on 17 November 2015 and the time when the court's registry opened in Perth on 18 November 2015. I do not accept that submission.
18 Since May 2015, the defendant has consistently maintained that it was entitled to call on the bank guarantees without reference to the plaintiff. On 10 November 2015 the defendant refused to give an undertaking to give the plaintiff notice before calling on the bank guarantees. The appropriate time for the plaintiff to seek injunctive relief was shortly after 10 November 2015, if it asserted that the defendant was not entitled to call on the bank guarantees and sought to restrain an apprehended breach of that asserted contractual right.
19 The terms of the bank guarantees clearly contemplate that they may be called upon without reference to the plaintiff.
20 The defendant called on the bank guarantees on 17 November 2015. Had the ICBC acted in accordance with the terms of its undertakings, and paid the amounts on demand without reference to the plaintiff, the plaintiff would have had no knowledge of the call and no opportunity to seek injunctive relief.
21 The defendant's actions on 18 November 2015 were merely a continuation of the process which had been commenced on 17 November 2015. I am not prepared to infer that the defendant accelerated the process to avoid the operation of an injunction. I infer that the banking was done in Sydney because that was the location of the issuing branch of the ICBC, rather than because the defendant sought to take advantage of the time difference between Sydney and Perth.
Legal principles
22 The general legal principles governing the present application are conveniently summarised in Best Tech & Engineering Ltd v Samsung C&T Corporation [No 2] [2015] WASC 447 in the following terms:
The general principles in relation to interlocutory injunctions are well settled. They were summarised by Mason ACJ in Castlemaine Tooheys Ltd v State of South Australia [1986] HCA 58; (1986) 161 CLR 148, 153as requiring the plaintiff to show:
(i) that there is a serious question to be tried or that the plaintiff has made out a prima facie case in the sense that if the evidence remains as it is there is a probability at the trial the plaintiff will succeed;
(ii) that the plaintiff will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and
(iii) the balance of convenience favours the granting of the injunction.
As Beech J observed in Twinside Pty Ltd v Venetian Nominees Pty Ltd:
'These principles were further explained by Gummow and Hayne JJ in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57, [65] - [71] (Gleeson CJ and Crennan J agreeing). Their Honours stated that the relevant principles are those stated in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, where the two main inquiries were said to be whether the plaintiff had made out a prima facie case and whether the balance of convenience favours the grant of the injunction. The phrase 'prima facie case' does not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed. It is sufficient that the plaintiff show a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial. How strong the probability needs to be depends upon the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the orders the plaintiff seeks: [65], [71].'
The principles by which a court will construe a bank's undertaking in a performance guarantee have been the subject of many decisions, most notably the decision of the High Court in Wood Hall Ltd v Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 (Wood Hall). In that case, Barwick CJ at (445) said that the unconditional nature of the bank's promise to pay on demand cannot be qualified by reference to the terms of the contract in relation to which the security is provided. Observations that such securities are the equivalent to cash were also made by Gibbs J (453) and Stephen J (457 - 458).
In a joint judgment by the Full Court of the Federal Court in Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458 (Clough Engineering), the court acknowledged three principal exceptions to the rule that a court will not enjoin the issuer of a performance guarantee or bond from performing its unconditional obligation to make payment.
The first exception is that the court will enjoin the party in whose favour the performance guarantee has been given from acting fraudulently. The second is that the party in whose favour the performance bank guarantee has been given may be enjoined from acting unconscionably in contravention of trade practices legislation. There is no suggestion of the application of either of those exceptions in this case.
The third exception is that which arises for consideration in this case. The exception was explained by Austin J in Reed Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd (1999) 15 BCL 158, 164 where he said:
'[I]f the party in whose favour the bond has been given has made a contract promising not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.'
In Clough Engineering, the court suggested that it 'may be preferable not to describe this as an exception but rather as an overriding rule, because it emphasises that the 'primary focus' will always be the proper construction of the contract': see also Owen J in Bateman Project Engineering Pty Ltd v Resolute Ltd [2000] WASC 284; [2000] 23 WAR 493 [30].
In Clough Engineering, the court referred with approval to observations by Charles JA and Calloway JA in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (Fletcher Construction) as to the commercial reasons for the requirement to provide a performance guarantee. The court said at [79]:
'In Fletcher Construction, Charles JA at 821 and Callaway JA at 826 recognised that there are generally two commercial reasons why a beneficiary of a performance guarantee may have stipulated for such an entitlement. One is to provide security for a valid claim against the contractor. The second, which is additional to the first, is to allocate the risk between the parties as to who shall be out of pocket pending the resolution of a dispute between them. Callaway JA went on to observe that it is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. He went on to say (at 827):
"Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract. No implication may be made that is inconsistent with an agreed allocation of risk as to who shall be out of pocket pending resolution of a dispute and clauses in the contract that do not expressly inhibit the beneficiary from calling upon the security should not be too readily construed to have that effect. As I have already indicated, they may simply refer to the kind of default which, if it is alleged in good faith, enables the beneficiary to have recourse to the security or its proceeds."'
It also follows that if Best Tech has established a serious question to be tried as to whether Samsung has complied with cl 3.2, then, because cl 3.2 contains, in effect, a promise not to exercise the security without fulfilling the specified requirements, it is open to grant an injunction restraining recourse to the security, having regard to normal principles applicable to interlocutory injunctions [18] - [27].
23 The plaintiff accepts that this is an accurate summary of the relevant principles.
24 One difference between this case and Best Tech is that the order sought in the present case is a mandatory, rather than a prohibitory, injunction. This does not alter the principles to be applied, although the fact that a mandatory injunction is sought does affect the balance of convenience: JTA Le Roux Pty Ltd v Lawson [No 2] [2013] WASC 373 [15] - [23].
Serious question to be tried
Proper construction of cl 4.1 of the contract
25 The plaintiff contends that cl 4.1 of the contract contains an implied promise not to convert the bank guarantees into cash, except for the purpose of utilising the security to pay for costs etc which the defendant claims it has or might incur as a consequence of an act or omission of the plaintiff which the defendant asserts constitutes a breach of the contract.
26 The plaintiff submits that there are three elements to this implied contractual promise:
1. There must be a claim by the defendant, present or future. The plaintiff contends that the making of a claim involves communication of the claim by the defendant to the plaintiff.
2. The claim must be consequential upon an act or omission of the plaintiff.
3. The defendant must have asserted that the plaintiff's act or omission constitutes a breach of the contract. This again requires communication of the assertion by the defendant to the plaintiff.
27 The plaintiff accepts that cl 4.1 is probably designed to allocate risk between the parties as to who should be out of pocket, pending resolution of a dispute between them. In my view it is clear that cl 4.1 is intended to serve that purpose. The reference in cl 4.1(b) to the defendant's 'claims', losses which 'might' be incurred in the future and conduct which the defendant 'asserts' constitutes a breach of contract makes this plain.
28 The plaintiff's construction of cl 4.1 as containing an implied contractual promise not to convert the bank guarantees into cash, except for the alleged purpose, seems inconsistent with the language of cl 4.1(b) of the contract. That subclause makes provision both for conversion of securities into cash and the utilisation of the converted cash. The express provision is that the defendant may convert the security into cash 'at any time'. The reference to the defendant converting the securities to cash 'at any time' seems inconsistent with a requirement that conversion may only occur where there is a claim and assertion of breach of contract.
29 The ordinary practice in a case such as the present, where the performance guarantee has a risk-allocation function, is to construe contractual terms which bear on basic issues in the case and which are capable of construction in the absence of further evidence: Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 [53], [111]. However, in the circumstances of the present case it is unnecessary for me to reach any final conclusion as to the proper construction of cl 4.1 of the contract in order to reject the plaintiff's submissions. For the purposes of dealing with this injunction application, I will assume that the plaintiff has an arguable case for construing cl 4.1 in the manner for which it contends. Even on that assumption, the evidence adduced in this application does not establish an arguable case that the bank guarantees were converted to cash for an unauthorised purpose. That is, the evidence does not support a case for breach of cl 4.1 even if that clause is construed in the manner for which the plaintiff contends. It is therefore unnecessary to finally resolve the construction question to determine the plaintiff's application for further injunctive relief.
Claim concerning defective panels
30 It appears that alleged defects in the VE panels were a contentious issue between the parties from November 2013.
31 On 20 May 2015, the defendant gave notice requiring the repair and replacement of panels by the end of that month. The letter indicated that, if this was not done, the defendant would issue a notice of default, arrange for the repair and replacement of the panels by others, and seek to recover the costs of doing so by calling on the bank guarantees.
32 On 7 July 2015, the defendant wrote to the plaintiff indicating that it was withholding $2,068,830 from a progress claim in respect of the rectification of VE panels. I do not accept the plaintiff's submission that this estimation of cost confined the amount which the defendant could seek in relation to the VE panels.
33 On 28 October 2015, the defendant wrote another letter demanding replacement of the panels by early January 2016. The letter asserted that the plaintiff was in breach of its obligations under the contract. The letter indicated that the defendant reserved its rights if the plaintiff did not comply with the demand, including its right to engage others to replace the panels and recover the cost of doing so from the plaintiff. The letter was written in a context where the State had, on 29 September 2015, issued a defect notice to the defendant in respect of the panels.
34 There is evidence that the defendant has estimated the cost of repairing and replacing the panels at $7.1 million.
35 Therefore, in terms of the plaintiff's construction of cl 4.1 of the contract:
1. The defendant has made a claim to the plaintiff that it may incur costs (which have never been finally quantified) in the future in replacing defective panels installed by the plaintiff.
2. That claim is consequential upon the act of the plaintiff in installing defective panels.
3. The defendant has asserted that the plaintiff's installation of defective panels, and its failure to rectify the defects, is a breach of the contract.
36 In a context where the defendant has estimated the cost of remedying the breaches at $7.1 million, it does not appear that the guarantees were called upon other than for the purposes which the plaintiff asserts are the only permissible purposes of converting the bank guarantees into cash.
37 The plaintiff argues that, if the defendant genuinely believed that it had a claim for $7.1 million, it would have set off the claim against the whole of the plaintiff's earlier progress claim in November 2015, under cl 12.1 and cl 12.18 of the contract. While it would appear the defendant had and did not exercise that entitlement, I am not prepared to draw an adverse inference against the defendant merely by reason of its failure to exercise its right of set off.
38 There appears from the correspondence attached to the affidavits read in this application to be a genuine dispute between the plaintiff and the defendant as to the existence and rectification of the defects in VE panels installed by the plaintiff. I am not in a position to resolve that dispute at this interlocutory stage. The existence of the dispute provided grounds for the defendant to call on the guarantees, even on the plaintiff's construction of cl 4.1 of the contract.
39 The plaintiff notes that the dispute resolution process provided for in cl 15 of the contract has been instituted and is not yet complete. However, the plaintiff does not contended the defendant must wait until the end of that dispute resolution process, which culminates in an arbitration, before calling on the guarantees. In light of the accepted purpose of cl 4.1 as a risk allocation measure, it is clear that the fact that the dispute resolution process is in train does not prevent the defendant from calling on the guarantees.
Claim for liquidated damages for delay
40 On 7 July 2015 the defendant claimed an entitlement to be paid $3,978,978.70 in liquidated damages for delay, from 26 July 2014 to 7 July 2015, in completion of contract works. This claim was made under cl 13.6 of the contract, which provides for liquidated damages of $100,000 per day of delay up to an aggregate of 6% of the Subcontract Sum. The amount claimed by the defendant is 6% of the Subcontract Sum.
41 Again, in terms of the plaintiff's construction of cl 4.1, a claim for an amount in excess of the value of the bank guarantees had been made and was asserted to arise from the plaintiff's failure to complete the contract works by the required time in breach of the contract. Having made such a claim, which appears to reflect the terms of the contract, the defendant was, even on the plaintiff's construction of cl 4.1, entitled to call in the bank guarantees to pay for the damages which it claimed to have incurred by reason of this delay.
Conclusion as to balance of convenience
42 For the reasons I have explained, I am not satisfied that the evidence adduced by the plaintiff establishes any reasonably arguable case that the defendant was not entitled to convert the bank guarantees into cash under cl 4.1 of the contract on 17 and 18 November 2015. On the assumption that cl 4.1 only allows the defendant to convert the bank guarantees to cash for the purposes asserted by the plaintiff, there is no proper basis for concluding that the defendant has acted for an unauthorised purpose. Therefore, I am not satisfied that there is any serious question to be tried. That conclusion is a sufficient basis for refusing the application for a further injunction.
Balance of convenience
43 Even if the plaintiff had established an arguable case, I would not have been prepared to exercise my discretion to grant the further injunctive relief which the plaintiff seeks.
44 On the assumption that the defendant was not entitled to convert the bank guarantees into cash under cl 4.1, the plaintiff's entitlement would now be to an order for repayment of that sum. The plaintiff will have a claim for a contractual debt, damages or restitution in that event.
45 I note that the plaintiff's written submissions deal, in considerable detail, with the legal basis upon which repayment may be claimed. It is unnecessary to consider the basis for a claim for repayment in any detail at this stage. The presently relevant point is that, whatever the juristic basis for the claim, the remedy will be an order that the defendant pay the plaintiff a sum of money. Given that is the only relief to which the plaintiff will ultimately be entitled, I am not satisfied that the plaintiff will suffer any irreparable injury for which damages will be an inadequate remedy if an injunction is not granted.
46 The plaintiff's only arguable entitlement to final relief is to an order that it be paid a monetary sum. I see no proper basis for the court to make an order requiring the defendant to pay money to the plaintiff in advance of the court making a final determination as to whether that money is actually payable.
47 An affidavit of Kevin Will, the plaintiff's operations director, contains a number of assertions that the calling in of the guarantees 'will have significant adverse impacts upon [the plaintiff's] credit and standing with its existing financial institutions'. It is also asserted that the impact would extend to impeding the plaintiff's ability to win further work.
48 The affidavit does not disclose any factual basis for these conclusionary statements. In the absence of any evidence of the facts on which Mr Will's belief was based, I am not prepared to attribute any significant weight to the generalised statements made in this part of his affidavit. In any event, the reputational damage referred to in the affidavit has already been done as the bank guarantees have been called upon.
49 Further, the impact of an injunction on the defendant must be balanced against any reputational damage to the plaintiff. The effect of the injunction would be to deprive the defendant of the benefit of the risk allocation measure contained in cl 4.1 of the contract while the disputes between the plaintiff and defendant are resolved. That is a powerful consideration against the grant of interlocutory injunctive relief: see Sugar Australia [33] - [35]. The prejudice to the defendant from the grant of an injunction would, in my view, outweigh the reputational damage to which the plaintiff refers.
50 It is also relevant to note evidence that the defendant is a large construction company with work in hand of approximately $5 billion, 3,000 employees and an annual turnover of approximately $3.5 billion. There is no reason, on the evidence before me, to apprehend that the defendant will be unable to pay any debt it owes to the plaintiff.
51 The orders sought by the plaintiff would not maintain the status quo. At the time that these proceedings were commenced, the status quo was that the bank guarantees had been converted into cash.
52 Having regard to all of these matters, I am not satisfied that the balance of convenience favours the grant of the further injunction which the plaintiff now seeks.
53 I note that the defendant also relied on the continuing operation of the injunction granted by Master Sanderson, which restrains the defendant from utilising the money, as supporting the conclusion that the balance of convenience is against the grant of a further injunction. I do not give that factor any significant weight. The defendant has indicated that it will soon apply to discharge that injunction. It would follow from my conclusion that there is no serious question to be tried that the application to discharge that injunction should succeed.
54 Further, once the bank guarantees have been converted to cash, the balance of convenience is very much against continuing that injunction. From the perspective of protecting the plaintiff's interests, once the securities are converted into cash, it matters little whether the money is held in a bank account operated by the defendant or used for some other purpose.
55 For these reasons, I do not approach the current application for an injunction on the assumption that the injunction granted by Master Sanderson will continue to operate for any significant time.
Conclusion
56 For the reasons I have given, I am not satisfied that the plaintiff has established any serious question to be tried. I am also not satisfied that damages are an inadequate remedy or that the balance of convenience favours the grant of further injunctive relief. Therefore, the plaintiff's application for a further mandatory injunction must be dismissed.
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