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CISG CASE PRESENTATION

China 23 January 1998 CIETAC Arbitration proceeding (Kidney bean case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/980123c1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISION: 19980123 (23 January 1998)

JURISDICTION: Arbitration ; China

TRIBUNAL: China International Economic and Trade Arbitration Commission [CIETAC] (PRC)

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/1998/13

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: People's Republic of China (claimant)

BUYER'S COUNTRY: Hong Kong (respondent)

GOODS INVOLVED: Kidney beans


Classification of issues present

APPLICATION OF CISG: Unclear. The Tribunal states that "the laws of the People's Republic of China apply" and in ruling on seller's claims, the Tribunal cites only provisions of Chinese domestic law. However, in evaluating buyer's defense, the Tribunal states that buyer did not provide sufficient evidence to establish that seller's conduct constituted a fundamental breach of contract under the CISG.

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 25

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Kidney bean case (23 January 1998)

Translation [*] by Zheng Xie [**]

-   The arbitration procedure
-   Facts
-   Position of the parties
-   Opinion of the Arbitration Tribunal
-   Award

THE ARBITRATION PROCEDURE

The China International Economic and Trade Arbitration Commission Shenzhen Sub-Commission (hereafter, the "Shenzhen Sub-Commission") accepted the case on 16 January 1997 according to:

   -    The Arbitration Rules of the China International Economic and Trade Arbitration Commission [hereafter, the Arbitration Rules], which took effect on 1 October, 1995;
 

   -    The arbitration clause in Contract No. GC/CHFS9608 (Zheng) (hereafter, the "Contract") for the sale of kidney beans signed by Claimant [Seller], __ Import and Export Corp., and Respondent [Buyer], __ Ltd, on 6 May 1996; and
 
   -    The written arbitration application submitted by the [Seller].

According to the Arbitration Rules, the [Seller] appointed an arbitrator, and the [Buyer] appointed an arbitrator; however, because the parties did not jointly appoint the Presiding Arbitrator within the stipulated period, the Chairman of the Shenzhen Sub-Commission appointed the Presiding Arbitrator. The aforesaid three arbitrators formed the Arbitration Tribunal. The first court session was opened in Shenzhen on 28 July 1997; both parties and their agents were present. On 18 October 1997, the Arbitration Tribunal opened the second court session; the [Seller] and its agent attended this court session; the [Buyer], however, was not present. After the court session, both parties submitted supplementary evidence.

On 23 January 1998, the Arbitration Tribunal handed down the award in writing.

FACTS

On 6 May 1996, the [Seller] and the [Buyer] signed Contract No. GC/CHFS9608(E) for the sale of kidney beans. The Contract stipulates:

Goods: The [Seller] shall sell to the [Buyer] 2,500 tons of kidney beans which were grown in 1995;
Unit price: US $ 375/ton FOB Dalian;
Payment: The [Buyer]'s affiliated entity, __ International Development (Group) Ltd. shall open an irrevocable L/C before 5 June 1996;
Shipping time: 25 June-15 July 1996; the [Buyer] shall inform the [Seller] of the shipping time at least seven days before the ship arrives at the designated port.

A dispute on liability for breach of contract and damages arose during the performance of the Contract and [Seller] submitted an arbitration application to the Shenzhen Sub-Commission

POSITION OF THE PARTIES

[Seller]'s claims

The [Seller] filed the following claims:

   (1)   The [Buyer] should compensate the [Seller] for its economic loss of US $181,500 and renminbi [RMB] 541,250.33;
 
   (2)   The [Buyer] should pay the arbitration fee and compensate the [Seller] for the expenses incurred for this case.

On 12 August 1997, the [Seller] specified the following six claims in writing:

1. The [Buyer] should compensate the [Seller] for the loss of US $181,500 incurred due to reselling the goods (i.e., the price difference between the original contract price and the resale price);

2. The [Buyer] should compensate the [Seller] for the extra storage fee (i.e., the storage fee incurred between the selling time stipulated in the Contract and the reselling time, i.e., RMB 0.13/day, the extra storage fees for the three times are respectively: 1. 300 tons X 137 days = RMB 5,343; 2.600 tons X 174 days = RMB 13,572; 3.1600 tons X 188 days = RMB 39,104);

3. The [Buyer] should compensate the [Seller] for the additional bank interest of RMB 483,231.33 (i.e., the bank loan interest incurred between the selling time stipulated in the Contract and the reselling time, i.e., 1.065% / month, the bank loan interest rate at the same day; the additional interest for the three times are, respectively: RMB 44,501.03, RMB 113,039.10, and RMB 325,691.20);

4. The [Buyer] should compensate the [Buyer] for the loss of bank interest due to late payment, US $10,209.38 (i.e., the interest on US $181,500 for nine months from November 1996 to August 1997, at the interest rate of 7.5%). The [Seller] requests that the interest be calculated to the day when the [Buyer] makes the payment;

5. The [Buyer] should pay the [Seller] the arbitration fee of RMB 89,413 (it should be 89,431);

6. The [Buyer] should pay the [Seller]'s arbitration agents' fee of RMB 100,000.

The total of the above is US $191,709.38 and RMB 730,663.33.

On 3 November 1997, the Secretariat of the Sub-Commission sent a written notice to the [Seller] requesting payment of an additional RMB 8,225 for the supplementary arbitration claims submitted.

Issues

The parties' disputes focus on the following issues:

1. The liability for breach of the Contract

      [Seller]'s position

      The [Seller] alleged that it was the [Buyer] who breached the Contract by not sending a ship on time in accordance with the Contract, so the Contract could not be performed. The shipping time stipulated in the Contract is from 25 June to 15 July 1996. The [Seller] sent a fax on 25 June 1996 requesting the [Buyer] to send a ship to take the delivery of the goods. Because the [Buyer] did not perform the contractual duty of sending a ship, the parties negotiated in __ City on 5 July 1996, and the [Seller] requested the [Buyer] to perform the Contract and send a ship to take the delivery within the shipping time stipulated in the Contract. The [Buyer]'s representatives __ and __ asserted that they could not send a ship within the stipulated shipping time, but agreed to the [Seller]'s request to increase the price; meanwhile, they requested the [Seller] not to resell the goods to others. With respect to the shipping time, the [Buyer]'s representatives, __ and ___, asserted that they would confirm the name of the ship and the shipping time as soon as possible when they went back to Hong Kong. On 9 and 23 July 1996, the [Seller] sent two faxes to the [Buyer] requesting it to respond immediately advising whether it could ship the goods before 10 August 1996, and also emphasized and sent the contents of the July 5 negotiation in writing via fax. In the fax sent to the [Buyer] on 23 July 1996, the [Seller] stated:

"The latest shipping time of the aforesaid Contract is 15 July 1996. Your two representatives came to __ City, and notified us that the Contract could not be performed before 15 July 1996. Considering our companies' long term cooperation, after negotiation, the parties reached an oral agreement on the price and other terms; the unit price was increased to US $395/MT FOB __ City; you agreed to confirm with us before 16:30 on 10 July 1996 whether you could perform the Contract and have the goods shipped before 10 August 1996. We then made many calls and sent faxes urging you to inform us of the name of the ship and the shipping time, but you did not reply at all."

In this fax, the [Seller] also asserted:

"The latest shipping time had expired, but the Contract still could not be performed. You breached the Contract, so you should be liable for the loss of processing fee, arranging fee, bank loan interest, and storage fee incurred due to such breach. Thereafter, we urged you to respond, but you did not provide any written response; therefore, you shall bear the liability and expenses incurred due to your breach of contract. Because you repeatedly postponed the performance, you shall be liable for any expenses we incurred to dispose the goods."

As to the [Seller]'s foresaid allegation, the [Buyer] did not raise any objection. In addition, the [Buyer] sent a letter to the [Seller] on 12 September 1996 stating:

"... due to a reason of __ Country's government, we cannot ship the goods to __ Country on time in accordance with the Contract. The only feasible measure is to sell the goods at any possible place in order to mitigate damages. Since the middle of July, we have been contacting several countries in order to sell the goods. It is hard to sell out the 2,500 MT of kidney beans by one transaction before the end of the year. So we request you to cooperate and reply in writing whether you agree to resell the goods by installments in order to mitigate the loss of storage fee and interest. We are looking forward to your reply via fax today agreeing on this arrangement."

The [Seller] alleged that the [Buyer] unilaterally breached the Contract, and caused the [Seller] to suffer severe economic loss, so the [Buyer] should be liable for compensation.

      [Buyer]'s position

      The [Buyer] alleged that the disputes arose in this case because the [Seller] failed to deliver all of the complying goods in accordance with the Contract, which caused the Contract could not be completely performed. According to the Contract, the [Buyer] has the right to examine the goods before the goods are loaded. The [Buyer] examined the goods twice at the beginning and the end of May, respectively, and found that the goods delivered by the [Seller] were not in compliance with the Contract and alleged that the [Seller] selected the kidney beans and should fix the problems. The [Buyer]'s supervisor went to __City to conduct the third inspection of the goods at the beginning of July, and found that the goods were still not conforming, so the [Buyer] announced that it rejected the goods due to the defects.

The [Buyer] also alleged that the quality inspection certificate issued by the People's Republic of China Commodity Inspection Bureau __ City Sub-Bureau shows that the first shipment, 300 MT kidney beans, which the [Seller] resold to Conagra Company, did not comply with the Contract with the [Buyer]. The goods contained about 3.3% incomplete beans, but the Contract stipulates that incomplete beans shall not exceed 3%. Conforming is conforming, and non-conforming is non-conforming; it cannot be alleged that the goods are almost conforming, or only a small portion of beans are not conforming, or a large portion of the goods are conforming. Because the Contract cannot be divided; regardless of how many beans are not conforming, and regardless how much it exceeds the stipulated standard, if there are some non-complying goods, the goods are not conforming to the Contract. In July 1996, the [Buyer] also shipped the same goods overseas from the other China import and export company. All facts prove that if the goods delivered by the [Seller] were complying with the Contract, the [Buyer] would not have rejected.

2. Whether the [Seller] suffered any loss in this transaction

The [Seller] asserted that the damages it claimed were determined by the actual loss caused by the [Buyer]'s breach. As the damages which the [Seller]'s breach caused to the [Seller] are true and objective, the [Buyer] should also be liable for the supplier's loss. The provision of damages stipulated in the parties' agreement states that whatever the arbitration award is, the [Seller] shall compensate the supplier for all of its loss. However, the [Seller]'s liability of compensation was caused by the [Buyer]'s breach, so the [Buyer] should be liable for the compensation.

The [Buyer] argued that the [Seller] did not suffer any actual loss under the Contract, and as least it did not provide any evidence to prove the actual loss. The [Seller], as an agent, suffered no loss (either the loss had been incurred or would be incurred); on the contrary, the [Buyer] suffered the loss of anticipated profit as high as US $87,500. Accordingly, the [Buyer] requested the Arbitration Tribunal not to sustain the [Seller]'s claims.

The [Seller] asserted that the [Buyer]'s allegation that the [Seller] as an agent suffered no damages and thus should not request the [Buyer] to compensate does not comply with legal principle, law, or facts. As an agent, if the [Seller] only received the commission, and was not liable for its principal's loss, obligations and rights would not be consistent. The current foreign trade agency in China is indirect agency. Article 13 of the Foreign Trade Law of the People's Republic of China stipulates, "The agent and the principal shall conclude and sign an agency agreement, in which the rights and obligations of both parties should be specified." The [Seller] and its principal signed their agency contract according to the law, and stipulated the obligations and rights. Article 19 of the Provisional Rules on Foreign Trade Agency System states:

"If the agent does not perform the agency agreement, or does not completely perform, or delays performing, or performs not complying with the agreement, the agent shall compensate the principal for the loss incurred, and shall also bear liability to the foreign party."

In this case, when the [Buyer] failed to perform the Contract, the [Seller] faxed the supplier's letters urging and claiming damages against the [Buyer] on 4 July and 9 September 1996, respectively, so the [Buyer] clearly knew its liability.

3. Whether the [Seller]'s resale price was reasonable

The [Seller] submitted evidence to prove the loss of price difference incurred due to reselling when the [Buyer] refused to take delivery of the goods. In the court session, the [Seller] stated that the large quantity of kidney beans which were prepared for the [Buyer] were stored in the warehouse for a period of time, and were not sold out until January 1997. When the new kidney beans in 1997 were sold in markets, the price of the kidney beans in the warehouse was affected, which led to some price difference.

The [Buyer] alleged that at that time, the market price was higher than US $400/MT (with reference to China Agriculture Products Tianjin Agriculture Products Import and Export Corp.'s quotation via fax on 30 August), but in September, the [Seller] resold the goods at US $330/MT FOB __ City. In the first page of the [Seller]'s supplementary opinion, the [Seller] also mentioned, "Considering the marketing price was increasing at that time," and this proves that at that time, the demand and price of kidney beans were increasing. However, the [Seller] resold the kidney beans to Conagra and Andra at a price 25% lower than the market price. This not only proves that the quality of the goods were so bad that they could be sold only at a reduced price, but also proves that the [Seller] did not fulfill its duty to sell the goods at a good price in order to mitigate the principal's loss. Although according to the agency agreement, the [Seller] is not liable for the principal's enlarged loss, the [Seller] insisted to bear liability, which has nothing to do with the [Buyer]. The [Buyer] asserted that the [Seller] did not deliver all of the goods complying with the Contract, so it breached the Contract and should be liable for the consequences.

OPINION OF THE ARBITRATION TRIBUNAL

1. Confirmation of facts

After hearing this case, the Arbitration Tribunal confirmed the following facts:

      (1) On 6 May 1996, the [Seller] and the [Buyer] signed Contract No. GC/CHFS9608(E) for the sale of kidney beans. The Contract stipulates the name of the commodity, specifications, quantity, shipment, unit price, inspection, payment, force majeure, penalty, arbitration, etc. The provisions related to the dispute in this case are as follows:

        1.   "Name of commodity: Chinese light speckled kidney beans 1995 crop long shape
        2.   Specifications: Moisture 15% max. admixture 1% max. broken & other colour & immature & wrinkle beans (imperfect) 3% max. 1995 crop yellow stained beans 3% max.
        3.   Quantity: 2,500.00 metric tons with 5% more or less at seller's option at the contractual price; weight must be measured by weight bridge at the date of loading at the port.
        4.   Shipment: During June 25, 1996 to July 15, 1996 at buyer's option. Buyer should give min. 7 days pre-shipment notice to seller prior to ship arrival at loading port
        5.   Unit price: US $375 / MT FOB stowed Dalian; China gross for net.
        6.   Inspection: Both shipped weight and quantity are as per CCIB's certificates for L/C negotiation purpose. Buyer's inspector is entitled to access the warehouses to carryout pre-shipment quality inspection and can reject any lot if they do not meet the specification of contract. Any claim against received quality and/or quantity shall be filed within 45 days after arrival of the goods at discharging port and supported by a survey report issued by a public surveyor.
        7.   Payment: By 100% irrevocable at sight L/C opened by Dalian Int'l (Holdings) Co. Ltd by TLX by June 5, 1996. Required shipping documents are.
        8.   Penalty & arbitration: Contract value must be paid by seller to buyer as compensation for seller's non-delivery if L/C is opened in order. Besides of it, and claim or dispute should be settled through amicably negotiation. In case no settlement can be reached through negotiation, the case shall be submitted to China International Economic & Trade Arbitration Commission, Shenzhen for arbitration. The arbitral award is final and binding upon both parties. The cost of arbitration are for the account of the losing party."

      (2) After the Contract took effect, the [Seller] processed the goods according to the Contract and the [Buyer]'s two requests. On 5 July 1997, the [Buyer]'s representatives finally examined the goods.

      (3) On 5 June 1996, the [Buyer] voluntarily sent a fax notifying the [Seller] that the goods would be loaded around 25-31 June in __ City.

On 25 June, the [Seller] inquired about the shipping time, and at the same time, the [Buyer] replied that it had booked a ship which would arrive 5 to 15 July.

On 5 June, because the [Buyer] did not inform of the shipping time, the parties negotiated. Thereafter, the [Seller] requested the [Buyer] to confirm whether the ship could arrive in Dalian before 10 August; the [Buyer] did not reply.

The [Seller] asserted that at this conference, the parties agreed to increase the contract price to US $395/MT. Because of lack of evidence, the Arbitration Tribunal does not sustain this allegation.

On 12 September, the [Buyer] informed the [Seller]:

"Because of reasons of the Mexican government...the goods could not be shipped at the designated time, and the only feasible measure is to resell the goods at any possible place in order to mitigate the loss ... the goods should be sold by installments or partially in order to mitigate loss of interest and storage fee."

      (4) On 1 and 14 November 1996, respectively, the [Seller] resold the 2,500 MT of kidney beans to Conagra and Andra at a price lower than the contract price. Due to the factors in the markets, a price difference of US $131,500 was incurred, and also the [Seller] incurred the additional storage fee of RMB 58,019 and the loss of interest because the goods could not be shipped and the payment could not be received.

2. Ruling by the Tribunal

Based on the aforesaid facts, the Arbitration Tribunal holds that:

      (1) The Contract the [Seller] and the [Buyer] signed on 6 May 1996 reflected the true intention of the parties, and it is valid and binding on the parties. The [Seller], the Claimant of this case, is a Chinese legal entity, so according to the principle of the most proximate connection, the laws of the People's Republic of China apply to this case.

      (2) The delivery term of the Contract is FOB. Therefore it is the [Buyer]'s essential contractual duty to send a ship to take the delivery of the goods at the stipulated time. However, the [Buyer] neither sent a ship to take delivery of the goods at the designated loading port at the time stipulated in the Contract (25 June - 15 July 1996) nor did so before 10 August which the [Seller] prolonged, so the [Buyer] fundamentally breached the Contract. According to the laws of the PRC and international customs, under term FOB, the [Buyer] shall compensate the [Seller] for the loss incurred due to reselling the goods because the Contract could not be performed. The loss includes that the storage fee of RMB 58,019, loss of the interest of RMB 243,905, and the price difference of US $131,500 plus interest.

Regarding the calculation of the price difference and interest in the [Seller]'s first, third, and fourth claims, the original contract price of US $375 /MT shall be the basis. The monthly interest rate of 1.065% in the [Seller]'s third claim is a bit high, the Arbitration Tribunal holds that the bank's loan monthly interest rate of 0.924% at the same time is reasonable. Because the [Seller] resold the goods and received the payments in three transactions, the [Seller]'s loss of interest shall be RMB 243,905 [it is calculated as the first transaction from 22 June to 23 September 1996: RMB 7,762,500 X 60 days X 0.000308 = RMB 143,451; the second transaction from 23 September to 1 November 1996: (RMB 7,762,500 - RMB 819,720) X 37 days X 0.000308 = RMB 79,120; and the third transaction from 1 November to 14 November 1996: (RMB 7,762,500 - RMB 819,720 - RMB 1,614,600) X 13 days X 0.000308 = RMB 21,334.]

In addition, because the [Seller] resold the goods at a price lower than that stipulated in the Contract, the interest on the price difference of US $131,500 shall be calculated from 14 November 1996 to the day of actual payment at the annual interest rate of 7.5%.

      (3) The Arbitration Tribunal notes the following claims by the [Buyer]:

      The [Buyer] alleged that inspection conducted on 5 July shows that one-third of the goods were not in compliance with the Contract, so the [Buyer] was entitled to revoke the Contract. However, the Arbitration Tribunal notes that in the fax sent on 12 September 1996, the [Buyer] definitely alleged that it could not send the ship because of the reason of __ Country, but not because of the quality problem of the goods.

After carefully reviewing the material, evidence, and statements submitted by the parties, the Arbitration Tribunal holds that the [Buyer]'s allegation that one-third of the goods were not in compliance with the Contract lacks sufficient evidence, and the only evidence submitted by the [Buyer] is the inspection certificate issued by the People's Republic of China Commodity Inspection Bureau Dalian Sub-Bureau on 13 October 1996 for the 300 MT of goods which the [Seller] resold to Conagra Regardless of whether the evidence can be admitted in this case because it is a shipping document under the Contract in this case, this certificate was issued more than three months after the time when the [Buyer] alleged that it had inspected the goods, so the color of the kidney beans might change, and the portion of different color kidney beans was increased. The inspection certificate shows that the incomplete kidney beans were 3.3%, which is 0.3% more than the specification stipulated in the Contract. According to the United Convention on Contracts for International Sales of Goods (CISG), this neither constituted a fundamental breach nor was it the reason for [Buyer] to revoke the Contract.

Also, Article 32 of the Law of the People's Republic of China on Economic Contract Involving Foreign Interest states: "Notices or agreements on the modification or rescission of contracts shall be made in writing." However, in this case, the [Buyer] did not inform the [Seller] in writing of its revocation of the Contract, so it lacks factual evidence and legal base for the [Buyer] to allege it revoked the Contract because the goods did not conform to the Contract. The Arbitration Tribunal does not sustain this allegation.

      (4) When the [Buyer] failed to send a ship at the time stipulated in the Contract, with the [Buyer]'s agreement, the [Seller] took reasonable measure to resell the goods in several transactions. Because the color of kidney beans easily changes, and the price of older kidney beans decreases when newer kidney beans are sold in market, after carefully reviewing the [Seller]'s evidence regarding the resale, the Arbitration Tribunal holds that it was reasonable for the [Seller] to resell the goods, and the [Buyer] shall compensate the [Seller] for the loss of price difference.

      (5) According to Article 20 of Provisional Rules on Foreign Trade Agency System enacted by the Ministry of Foreign Trade and Economic Cooperation of the PRC, the [Seller] as the agent shall take the responsibility to claim damages as the party of the foreign trade contract with the [Buyer] in order to compensate the principal's damages caused by the non-performance of the Contract.

      (6) With respect to the [Seller]'s claim for the attorneys' fee and other expenses according the Arbitration Rules, the Arbitration Tribunal sustains the [Seller]'s claim. The [Buyer] shall compensate for reasonable expenses incurred for this case, but the compensation shall not exceed 10% of the amount in this award. The [Seller] claimed RMB 100,000 for the attorneys' fee: the Arbitration Tribunal sustains RMB 70,000.

      (7) The [Buyer] shall bear the arbitration fee.

AWARD

According to the above facts and the Arbitration Tribunal's opinions, the Arbitration Tribunal handed down the following award:

1. The [Buyer] shall compensate the [Seller] for the loss of US $131,500 due to reduced price for reselling within 30 days of this award, plus interest (at the annual rate of 7.5%) from 14 November 1996 to the day of the payment made, the storage fee of RMB 58,019, the bank loan interest of RMB 243,905, and the attorneys' fee of RMB 70,000. If the [Buyer] fails to make the payment within the stipulated time, interest shall be added at the annual rate of 12% for RMB and 7.5% for US dollars.

2. The [Buyer] shall bear the arbitration fee and other expenses for this case.

This is the final award.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the People's Republic of China is referred to as [Seller]; Respondent of Hong Kong is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

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