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Vitiating Factors Notes

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II. Vitiating Factors

Contract Void

Common Mistake

McRae v Commonwealth Disposals Commissions (1950)

* Failure of a condition precedent, or

* Total failure of consideration

Mutual Mistake

No coincidence with the agreement: Raffles v Wichelhaus (1864)

Unilateral Mistake

Unilateral mistake as to identity, contract made at distance: Cundy v Lindsay (1878)

Non est factum

Contract void when a plea is established.

Contract Voidable Three conditions to set aside in Equity: Solle v Butcher:

* The parties were under a common misapprehension;

* The misapprehension was fundamental;

* The party seeking to set the contract aside is not itself at fault

* Unilateral mistake as to fundamental terms: Taylor v Johnson (1983)

* Unilateral mistake as to identity, contract made face to face: Lewis v Averay [1972]

Duress

Contract Voidable

Undue Influence

Contract Voidable

Unconscionable Transaction

Contract Voidable

Mistake

Often the same facts can be analysed as mistake or misrepresentation, the issue being which provides a better remedy.

* Mistake is different to misrepresentation in that it is purely an excuse. Unlike misleading and deceptive conduct, for example, it does not provide a statutory cause of action nor any right to relief by way of 1

II. Vitiating Factors

damages. Mistake is purely defensive, allowing mistaken parties to deny their obligations under the contract to which they have erroneously agreed. A mistake will usually be raised as a defence to a claim of enforcement against that party for failing to perform (or for their anticipatory breach). A mistake, successfully raised, will result in a court order declaring the contract void (setting it aside ab initio - at common law) or voidable (in the case of equity).

* Different rules apply to mistakes at common law to those in equity. If the common law accepts that a mistake is operational, then contract is void ab initio. In equity, however, the contract is merely said to be voidable, meaning that the contract remains valid until the party relying on the mistake elects to avoid their obligations.

* This distinction between void and merely voidable is important for third parties upon whom the contract confers rights or benefits. For example, if a contract purports to sell an item, which is later sold to an independent third party, then if the original contract of sale is found to be void ab initio then the third party does not possess good title. However, if that contract is merely voidable, then if the resale occurs prior to the voidance, valid title passes. There are five possibilities to be considered in any analysis of the consequences of mistake in contract:

* The most common situation is that the mistake may have no effect at all.

* Because it is neither operative nor the result of a representation by one of the parties.

* The presence of mistake may be relevant to equitable relief, to set aside the contract, to refuse specific performance or to order rectification.

* The mistake may be associated with a right to rescind a contract ab initor ('from the beginning').

* The mistake may be operative in the sense that it renders the contract void ab initio, that is, the contract never came into existence.

* The mistake may be a basis for recovering money paid.

* This is governed by principle regulating restitution for unjust enrichment. Common Mistake Subjective mistake cannot be used as a defence to specific performance or as a basis for rescission of the contract: McRae v Commonwealth Disposals Commissions (1950)

* If the mistake was the result of one party's fault, such as where it was induced by that party's reckless assertions, he or she cannot hide behind a plea of common mistake to escape liability for the natural consequences of that recklessness: McRae v Commonwealth Disposals Commissions (1950) A contract is voidable if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault: Solle v Butcher [1950]

* However, in the case of sale of land at any rate, equitable relief will not be granted unless there has been fraud or material misrepresentation induced by one party or there is a total failure of consideration, partial failure of consideration will not suffice: Svanosio v McNamara (1956) a. Common law approach McRae v Commonwealth Disposals Commission (1950) 84 CLR 377 b. Alternative Relief in Equity If the common mistake does not render the contract void at common law or in equity (usually because the mistake was not sufficiently fundamental to prevent the contract being formed in the first place), equity can intervene in a number of ways to ensure justice is done. 2

II. Vitiating Factors

1. Butcher, the defendant, leased a flat to Solle, the plaintiff, for a term of seven years.

2. Both Butcher and Solle believed that because of extensive structural alterations to the premises the flat was not governed by the Rent Restriction Acts 1920 and

1923. 3. This view was incorrect and as a result of the maximum permissible rent allowable under the Act, unless a notice of increase had been given to the tenant before the lease was signed, was $140 per annum.

4. Solle commenced an action against the defendant in which he claimed a declaration that the maximum permissible rent was $ 140 per annum and that he was entitled to recover the excess he had paid under the lease.

5. On appeal by the defendant. Issue: (1) Whether on the facts of the case the county court judge was right in finding that the standard rent of the premises was 140l. a year; if so (2) Whether the landlord was right in his contentions that he was entitled to a rescission of the lease on the ground of

* common mistake, or

* innocent material misrepresentation by the plaintiff; and

* whether the tenant was estopped from claiming the benefit of the Rent Restriction Acts. Held, Appeal allowed, judgement for the defendant. The contract was set aside.

Misleading and deceptive conduct

Three requisite to set aside a contract in equity for common mistake:

* The parties were under a common misapprehension;

* The misapprehension was fundamental;

* The party seeking to set the contract aside is not itself at fault

1. Executor of a deceased's, the vendor, entered into a contract with Svanosio, the purchaser under which they agreed to sell him a land together with a victualler licence in respect of a hotel erected thereon.

2. No survey was made and "only a cursory examination" was made of the vendor's title.

3. The conveyance was executed and the licence transferred.

4. It was discovered a few months later that the hotel was in fact only partially built on the land conveyed and that a substantial part of it stood on unalienated Crown land.

5. Both parties had assumed that the hotel was erected on the land described in the conveyance. Held, the contract is not voidable. Judgment for the vendor.

Solle v Butcher [1950] 1 KB 671 Denning J: Void & Voidable In order to see whether the lease can be avoided for this mistake it is necessary to remember that mistake is of two kinds:

* first, mistake which renders the contract void, that is, a nullity from the beginning, which is the kind of mistake which was dealt with by the courts of common law; and,

* secondly, mistake which renders the contract not void, but voidable, that is, liable to be set aside on such terms as the court thinks fit, which is the kind of mistake which was dealt with by the courts of equity. Since the fusion of law and equity, ...it will be found that only those contracts are now held void in which the mistake was such as to prevent the formation of any contract at all. Nullify a Contract Let me first consider mistakes which render a contract a nullity. All previous decisions on this subject must now be read in the light of Bell v. Lever Bros. Ld. . The correct interpretation of that case, to my mind, is that, once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground. Neither party can rely or his own mistake to say it was a nullity from the beginning, no matter .that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake. A fortiori, if the other party did not know of the mistake, but shared it. Contract Void under Common Law
...He [The landlord, defendant] made the fundamental mistake of believing that the rent he could charge was not tied down to a controlled rent; but, whether it was his own mistake or a mistake common to both him and the tenant, it is not a ground for saying that the lease was from the beginning a nullity.... Contract Voidable under Equity Let me next consider mistakes which render a contract voidable, that is, liable to be set aside on some equitable ground. Whilst presupposing that a contract was good at law, or at any rate not void, the court of equity would often relieve a party from the consequences of his own mistake, so long as it could do so without injustice to third parties. The court, it was said, had power to set aside the contract whenever it was of opinion that it was unconscientious for the other party to avail himself of the legal advantage which he had obtained: Torrance v. Bolton per James L.J.
It is now clear that a contract will be set aside if the mistake of the one party has beer induced by a material misrepresentation of the other, even though it was not fraudulent or fundamental; or if one party, knowing that the other is mistaken about the terms of an offer, or the identity of the person by whom it is ma de, lets him remain under his delusion and concludes a contract on the mistaken terms instead of pointing out the mistake.
A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault. Svanosio v McNamara (1956) 96 CLR 186 In the case of the sale of land at any rate, relief has never been given on the ground of innocent misrepresentation after the contract has been executed and it is difficult to see why common mistake, unless it leads to a total failure of consideration, should be in any different position. It is difficult to conceive any circumstances in which equity could properly give relief by setting aside the contract unless there has been fraud or misrepresentation or a condition can be found expressed or implied in the contract (emphasis added). Really there are three stages in the sale of land,

* First, the making of the contract of sale;

* Secondly the interval between the making of the contract and its completion to allow the purchase to investigate the title, to survey the land and make any relevant inquiries as for instance as to tenancies, and

* Thirdly the completion of the contract by the conveyance of the land and the payment of the purchase money. 3

II. Vitiating Factors

c. Legislation SALE OF GOODS ACT 1923 11 Goods which have perished Where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void. Mutual Mistake At common law, a contract entered into under mutual mistake is void.
Only applies where it is clear that the parties were contracting at cross-purposes.
To determine whether the parties were contracting at cross-purposes, the courts have to ascertain as objectively as possible "the sense of the promise".
What this means is that the courts try to ascertain what a reasonable person would have thought of the agreement.
*> If a reasonable person would have understood the contract to mean what one of the parties understood it to mean, the contract will be enforced on that interpretation.
*> If a reasonable person could not have ascertained with certainty what was meant (that is, if he or she could not have preferred one version to the other), the contract will be void. When there is a mutual mistake in the contract and where it seems obvious that as there is an ambiguity, that is to say, non of the circumstances point to one meaning rather than the other, there is no contract. It is an objective test. The contract is void because the offer and acceptance did not coincide and there was no true consent: Raffles v Wichelhaus (1864)

* However, if a court can objectively ascribe a meaning to an agreement, it will enforce that agreement in the sense ascribed: Goldsbrough Mort & Co Ltd v Quinn (1910) Goldsbrough Mort v Quinn (1910) 10 CLR 674

1. The parties had entered into a contract for the sale of a shipment of cotton to arrive "ex Peerless from Bombay".

2. In fact, there were two ships called Peerless, both sailing from Bombay and both carrying cotton.

3. One was leaving in October, the other in December.

4. The buyer intended to contract for the October shipment, the seller meant the December shipment.

5. When the December vessel arrived, the seller sought to enforce the contract.

6. The buyer refused to accept delivery on the grounds he had only intended to buy the cotton shipped on the October vessel.

7. The vendor sued the buyer for the price. Held, there is no contract for the mutual mistake.

Raffles v Wichelhaus (1864) 2 H & C 906 Though courts will strive to find a reasonable interpretation in order to preserve the agreement whenever possible, the court in Raffles could not determine which ship named Peerless was intended in the contract. Consequently, as there was no consensus ad idem (as defendant alleged), the two parties did not agree to the same thing and there was no binding contract. Therefore, the defendants prevailed, and did not have to pay. Unilateral Mistake Operative unilateral mistake occurs where only one party to the contract is mistaken, the other party is or should be aware of that mistake and yet purports to proceed with the agreement anyway. Relationship between unilateral mistake and mutual mistake

* Mutual mistake, the parties are speaking at cross-purpose
*> True meaning cannot be reasonably ascertained by a third party
Contract void
*> True meaning can be reasonably ascertained by a third party equal to the understanding of one party
Contract enforceable according to the understanding of one party
The other party whose understanding is different pleas for unilateral mistake

4 II. Vitiating Factors

A unilateral mistake in relation to a fundamental term may render a contract voidable if the mistake was so serious and no right of innocent third party would be affected: Taylor v Johnson (1983)

* But it does not mean that a seller is under an obligation to inform a buyer of the buyer's mistake, so long as the mistake was not induced by the seller: Smith v Hughes (1871)

* Silence does not amount to fraud or deceit: Smith v Hughes (1871) When a contract was made face to face, a unilateral mistake as to the defendant's identity will the contract voidable: Lewis v Averay [1972]

* However, when the contract was made at distance, such as by correspondence, the unilateral mistake as to the identity will render a contract void, not voidable: Cundy v Lindsay (1878) Unilateral mistake in relation to terms

1. The parties had contracted to buy and sell 10 acres of land for a total price of $15,000.

2. Mrs Johnson, the vendor, alleging that she believed the contract was for $15,000 per acre instead of $15,000 in total, refused to complete.

3. Taylor, the purchaser, sued for specific performance.

4. Johnson sought rectification or, alternatively, an order setting the contract aside.

5. Evidence showed that when Mrs. Johnson signed both the option and the contract of sale,Taylor had known she was seriously mistaken about either the price or the value of the land and had deliberately set out to ensure that she did not become aware of the truth. Held, judgment for the vendor.The contract was voidable and set aside.

Taylor v Johnson (1983) 151 CLR 422 Where one party to a written contract has entered into it under a mistake as to the existence or content of an actual term, the contract is not void ab initio, no matter that it was mistake which to the party's mind was fundamental, or that the other party knew that the first party was under a mistake.

* Two positions when a contract is invalid for unilateral mistake:

* Subjective theory: A contract is void if one party to the contract enters into it under a serious mistake as to the content or existence of a fundamental term and the other party has knowledge of that mistake: Smith v Hughes (1871)
Accordingly, there is no binding contract either at common law or in equity, equity following the common law in this respect.
The contract is void ab initio.

* Objective theory: The law is concerned not with the real intention of the parties, but with the outward manifestation of those intentions.
There is a contract which, in conformity with the common law, continues to be binding, unless and until it is avoided in accordance with equitable principles which take as their foundation a contract valid at common law but transform it so that it becomes voidable.
The contract is voidable only.
Australia courts adopt the objective theory. A party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity, at least where the other party has not materially altered his or her position and the rights of strangers have not intervened, to an order rescinding the contract if the other party was aware that circumstances existed which indicated that the first party was entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately set out to ensure that the first party did not become aware of the existence of his or her mistake or misapprehension.

1. The plaintiff, Smith, offered to sell the defendant, Mr. Hughes, oats, and exhibited a sample; the defendant took the sample, and on the following day wrote to say that he would take the oats at the price of 34s per quarter.

2. The defendant afterwards refused to accept the oats on the ground that they were new, and he thought he was buying old oats.

3. The plaintiff, who knew the oats were new, refused to take them back and sued for the price.

4. On appeal by the plaintiff. Issues Whether the jury was correctly directed that the plaintiff had been bound by the defendant's belief by silence?
Held, Appeal allowed and order for a new trial.The trial judge was error in direction.

Smith v Hughes (1871) LR 6 QB 597 "If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms."
A party is not bound by the other party's subjective intention. Instead, intention should be judged objectively.
Silence does not amount to fraud or deceit. Cockburn CJ, Suppose a person to buy a horse without a warranty, believing him to be sound, and the horse turns out unsound, could it be contended that it would be open to him to say that, as he had intended to buy a sound horse, and the seller to sell an unsound one, the contract was void, because the seller must have known from the price the buyer was willing to give, or from his general habits as a buyer of horses, that he thought the horse was sound? The cases are exactly parallel. Blackburn J In this case I agree that on the sale of a specific article, unless there be a warranty making it part of the bargain that it possesses some particular quality, the purchaser must take the article he has bought though it does not possess that quality. And 5

II. Vitiating Factors

If the word "old" was not used in the contract, did the seller believe the buyer to be under the impression that he was contracting for old oats? If so, verdict for the buyer. (trial judge's direction)

I agree that even if the vendor was aware that the purchaser thought that the article possessed that quality, and would not have entered into the contract unless he had so thought, still the purchaser is bound, unless the vendor was guilty of some fraud or deceit upon him, and that a mere abstinence from disabusing the purchaser of that impression is not fraud or deceit; for, whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor. And I also agree that where a specific lot of goods are sold by a sample, which the purchaser inspects instead of the bulk, the law is exactly the same, if the sample truly represents the bulk; though, as it is more probable that the purchaser in such a case would ask for some further warranty, slighter evidence would suffice to prove that, in fact, it was intended there should be such a warranty. ... But I have more difficulty about the second point raised in the case. I apprehend that if one of the parties intends to make a contract on one set of terms, and the other intends to make a contract on another set of terms, or, as it is sometimes expressed, if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other. The rule of law is that stated in Freeman v Cooke. If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms.
....... But the second direction raises the difficulty. I think that, if from that direction the jury would understand that they were first to consider whether they were satisfied that the defendant intended to buy this parcel of oats on the terms that it was part of his contract with the plaintiff that they were old oats, so as to have the warranty of the plaintiff to that effect, they were properly told that, if that was so, the defendant could not be bound to a contract without any such warranty unless the plaintiff was misled. But I doubt whether the direction would bring to the minds of the jury the distinction between agreeing to take the oats under the belief that they were old, and agreeing to take the oats under the belief that the plaintiff contracted that they were old. The difference is the same as that between buying a horse believed to be sound, and buying one believed to be warranted sound; but I doubt if it was made obvious to the jury, and I doubt this the more because I do not see much evidence to justify a finding for the defendant on this latter ground if the word "old" was not used. There may have been more evidence than is stated in the case; and the demeanour of the witnesses may have strengthened the impression produced by the evidence there was; but it does not seem a very satisfactory verdict if it proceeded on this latter ground. I agree, therefore, in the result that there should be a new trial. Unilateral mistake in relation to identity (Parties face to face) -->Contract voidable

1. Mr Lewis, a postgraduate student, owned a motor vehicle which he wanted to sell.

2. He showed it to a person who came to his flat and falsely claimed to be Richard Greene, the well known actor who played Robin Hood in a television series.

3. The party agreed on a price of $450, and the rogue wrote out a cheque for that amount.

4. Mr Lewis was unwilling to hand over the car until the check was cleared.

5. In order to make Mr Lewis rest assured, the rogue produced an official Pinewood Studios pass with the name "Richard Green" and a photograph of himself.

6. Mr Lewis handed over the car and later was unable to dishonour the cheque.

7. In the meantime, the rogue sold the car to Mr Averay, an innocent purchaser for
$200, and disappeared.

8. Mr Lewis claimed the car for conversion.

9. Trial was for Mr Lewis, on appeal by the innocent buyer, Averay. Held, Appeal allowed, judgement for Averay.

Lewis v Averay [1972] 1 QB 198 When two parties have come to a contract --- or rather what appears, on the face of it, to be a contract --- the fact that one party is mistaken as to the identity of the other does not mean that there is no contract, or that the contract is nullity and void from the beginning. It only means that the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights under it.. Reasoning

* The real question in the case is whether there was a contract of sale under which the motor vehicle passed from Mr Lewis to the rogue?

* If there was such a contract
then even though it was voidable for fraud, nevertheless Mr Averay would get a good title to the car.

* But if there was no contract of sale by Mr Lewis to the rogue, either because there was no agreement or agreement void ab initor for mistake
then no property would pass from Mr Lewis to the rogue.
Mr Averay would not get a good title because the rogue had no property to pass to him.

* I felt it wrong that an innocent purchaser (who knew nothing of what passed between the seller and the rogue) should have his title depend on such refinements. After all, he has acted with complete circumspection and in entire good faith, whereas it was the seller who let the rogue have the goods and thus enabled him to commit the fraud.
I do not, therefore, accept the theory that a mistake as to identity renders a contract void. 6

II. Vitiating Factors

Unilateral mistake in relation to identity (Parties at a distance) --Contract void

1. The plaintiff received an order for a large quantity of handkerchiefs from Blenkarn, who gave his address as "37 Wood Street, Cheapside".

2. The order was signed in such a way it appeared to come from "Blenkiron & Co", a respectable firm known to the plaintiffs by reputation and carrying on business at 123 Wood Street, Cheapside.

3. The plaintiffs filled the order addressing the goods to "Blenkiron & Co, 37 Wood street Cheapside".

4. When Blenkarn received the handkerchiefs, he sold 250 dozens to the defendants and then decamped without paying the plaintiffs' account.

5. On discovering the truth, the plaintiffs sued the defendants in conversion. Issue: Whether there is a valid contract between the plaintiff and the roger?
Held, Judgment for the plaintiff, the innocent third party buyer did not have a good title for the goods. (Recording 36 min)

* This only applies to the identity of the person, not applies to attribute of the person. Mostly we talk about rectification where there is a common mistake; but it actually is available in unilateral mistake and mutual mistake (but very rare).

1. The parties had contracted for the sale and purchase of a block of land described as "subdivision 1 of portion 1154" under the common mistaken belief that a bore and an area of cultivation lay within the land so described.

2. When the error was discovered, the purchaser sought to have the contract rectified.

3. Trial was for the purchaser, reversed when appealed.

4. Now on appeal by the purchaser. Held, Appeal dismissed. Judgement for the vendor.

* He could discharge the very high burden

* He could not identify what the exactly the term they had agreed to, cannot identify the very precise language, then you cannot get the contract rectified.

Cundy v Lindsay (1878) 3 APP Cas 459 In this case, the plaintiffs succeeded because the plaintiffs had only intended to deal with the Blenkiron & Co and because that fact must have been known to Blenkarn, there was no contract with Blenkarn. Consequently, the roger had obtained no title to the goods and had no good title to pass to the defendants. In another word, the defendants, in possession of goods they did not own (even though innocently), were therefore liable in conversion.

* A controversial case. Distinguished from Lewis v Averay.

* Lewis is a good law in Australia. General rule in regards of the title of the goods to a third party:

* If he purchases the chattel in market overt, he obtains a title which is good against all the world;

* but if he does not purchase the chattel in market overt, and if it turns out that the chattel has been found by the person who professed to sell it, the purchaser will not obtain a title good as against the real owner.

* If it turns out that the chattel has been stolen by the person who has professed to sell it, the purchaser will not obtain a title.

* If it turns out that the chattel has come into the hands of the person who professed to sell it, by a de facto contract, that is to say, a contract which has purported to pass the property to him from the owner of the property, there the purchaser will obtain a good title, even although afterwards it should appear that there were circumstances connected with that contract, which would enable the original owner of the goods to reduce it, and to set it aside, because these circumstances so enabling the original owner of the goods, or of the chattel, to reduce the contract and to set it aside, will not be allowed to interfere with a title for valuable consideration obtained by some third party during the interval while the contract remained unreduced. Rectification of documents Rectification is only available when there is something intended by the parties at the time of the contract but has been omitted in the contract: Pukallus v Cameron (1982) The party seeks rectification must provide convincing proof that the written contract does not embody the final intention of the parties: Pukallus v Cameron (1982) Pukallus v Cameron (1982) 180 CLR 447 Principle of rectification:

* There need not be a concluded antecedent contract, but there must be an intention common to both parties at the time of contract to include in their bargain a term which by mutual mistake is omitted therefrom.

* The party requires rectification must provide "convincing proof" that the written contract does not embody the final intention of the parties. The omitted ingredient must be capable of such proof in clear and precise terms. The Court must not assume for itself the task of making the contract for the parties. The appellants were not entitled to an order for rectification of the contract on the ground that there was no evidence to support a finding of an intention to contract for the sale of the cultivated land and the bore, but the sale was a sale of subdivision 1, and accordingly the requirement of proof of a common intention to include in the contract a term which by mutual mistake had been omitted therefrom had not been satisfied; and on the further ground that the evidence failed to establish precisely and with clarity a boundary line which the parties mistakenly believed was to be that of the land sold, and therefore the precise variation to be made to the contract. Non est factum The Latin expression non est factum ('it is not my deed') signifies a defence of 'plea' by a person who seeks to disown a deed or other document which it is alleged he or she sealed or signed.

* Contract is void when the "non est factum" plea is established: Petelin v Cullen (1975)

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