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Fall 2003 Contracts – Professor Dawson
Introduction to Consideration, Reliance (pp 1- 45)
Dougherty v Salt (NY Court of Appeals, 1919) Aunt makes promise to nephew for $3000 because he has always been a “good boy.” Promise is not enforceable b/c there is no consideration. Donative promises are not enforced by the courts. “Nothing is consideration that is not considered such by both parties.”
R §1: Definition of a Contract A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.
- Used as synonym for “agreement” or “bargain.”
- Also recognized as the resulting legal obligation or the entire resulting complex of legal relations.
Promise: the manifestation of intention to act (or to refrain from acting)
R § 17: Requirement of Bargain (1) Manifestation of mutual assent to the exchange, AND (2) a Consideration (except R § 82-94)
R § 73: Requirement of Exchange; Types of Exchange (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise AND is given by the promisee in exchange for that promise. (3) The performance may consist of (a) an act other than a promise, or (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation (4) The performance or return promise may be given to the promisor or some other person. It may be given by the promisee or by some other person.
- the promisor seeks either a return promise or a performance from the promise in exchange for the promise, AND
- the promise gives the return promise or performance to the promisor in exchange for the promise.
- The consideration must induce the making of the promise AND the promise induces the furnishing of the consideration. Must have both elements (mutual assent).
- “consideration is a type of test of whether the courts want to enforce a contract or not.”
- If consideration is met, no additional requirement for equivalence of values exchanged (favorite toy for $3K is ok)
Nominal consideration: when a transaction has the FORM of a bargain, but not the substance of a true bargain because the values of what is exchanged or promised are not equal. (a sham bargain) (p 17) Ex: Father tells son he will give him $10K for a “book.” The book does not have any true value to the son and is as such a “sham” bargain. Father doesn’t really want the book and the book really does not have any value to the son. And son isn’t really giving the book. No mutual assent, no real exchange.
[Difference b/w sham and nominal consideration, at least the nominal object is given, in sham agreements it is not actually exchanged]
Kirskey v Kirskey (Ala, 1845) [p. 23] Brother-in-law invites brother’s widow and her children to come live with him. They do, then he kicks them out. Promise was NOT enforced b/c no consideration. [Would not be decided in same way today b/c of newer doctrine of reliance.]
Dawson: Why did she ask for $200? Why not have courts make him let her live on property?
- breach of contracts are compensated through monetary damages
- courts don’t like to force people to perform actions, especially in family matters like this one and Doughterty (Both family matters)
- can’t control relationships or feelings, can’t or don’t want to police them
The court’s recognition of the concept of RELIANCE did not come until 1932. Prior to that, the courts followed the Classical Contract laws set forth by Samuel Williston, which stated that only a bargain is consideration.
RELIANCE :
- Estoppel en pais or Equitable Estoppel A makes statement of fact to B If B relies on statement, then A cannot later deny the truth of the statement.
(1) Requires a statement of FACT (2) Not used in section 90 cases (reliance – requires a promise) (3) Defendant is prevented from denying something
- Promissory Estoppel
R § 90 : Promise reasonably inducing action or forbearance
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- Today’s lawyers are not limited by consideration and bargain, but are turning more and more to reliance to enforce contracts
- However, tendency is still to look first for consideration and whether or not there is a bargain.
- (^) §90 and Consideration are important concepts, they are the basic doctrinal reasoning for enforcing promises
The Bargain Principle; Forbearance; Mutuality (pp 46-67, pp. 85-109)
D: - Consideration is only one way of deciding whether or not to enforce a promise or not.
- Many of these cases have bargains, yet the promises are not enforced.
- Rules help decide which promises to enforce, but the rules change over time (e.g., unconscionability, a relatively new concept/doctrine)
- At turn of last Century, courts manipulated the doctrine of consideration to determine which promises to enforce.
- Courts should be more direct in saying what they are doing and not hide behind doctrines (they are doing this more now than they used to)
Hamer v Stidway (New York, 1891) Uncle promises nephew $5K if he refrains from drinking, using tobacco, swearing, and playing cards or billiards for money until age 21.
- It was a bargain b/c an exchange of a promise for a performance (waiver of legal rights). Benefit to the promisor does not matter.
- § 70 : Promisor seeks something and promisee gives
- People should be able to make own decisions about what they give or exchange, not for the courts to decide. Not the court’s business to revalue contracts; everyone who makes a “bad deal” would go to court.
R § 79: Adequacy of Consideration; Mutuality of Obligation If the requirement of consideration is met, there is no additional requirement of (a) A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promise; OR (b) equivalence in the values exchanged; OR (c) “mutuality of obligation.”
- nominal considerations or “sham” bargains do not count, they are a “pretended exchange”
- purpose of this rule is that parties are free to fix their own valuations
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Williams v. Walker-Thomas Furniture Co (1965, D.C.)
Poor woman buys items from store with a “pro rata” contract so that as long as she kept buying new items, she could only pay proportional amount on previous items bought and store retained title to ALL items. Issue: Whether unconscionable contracts are enforceable.
UNCONSCIONABILITY: (p. 64-5) (1) The absence of meaningful choice, AND (2) Terms which are un reasonably favorable to the other party
- Meaningful choice? Have to consider all the circumstances:
- Inequality of Bargaining Power
- Manner in which contract was entered into
- Reasonable opportunity to understand terms of contract
- (^) Important terms hidden and/or minimized?
- Little bargaining power ≠ no meaningful choice
- If person has little bargaining power (little real choice) AND signs an unreasonable contract with little or no knowledge of its terms, the court should determine if the terms of the contract are so unfair that enforcement should be withheld.
- Primary concern must be with terms of the contract considered in light of the circumstances existing when contract was made.
R § 208: Unconscionable Contract or Term If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.
- Restatement doesn’t say what it is, nice little loophole
- (^) Decision re unconscionability made in light of setting, purpose, and effect
UCC § 2-302: Unconscionable Contract or Clause
- used in drafting the Restatement version
- Principle is “one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks b/c of superior bargaining power”
Uniform Commercial Code: § 102 – always identifies the SCOPE of that Article
- if the scope applies, have to follow the rules
- (^) If not, don’t have to follow § 103 – Definitions within that article
UCC § 2-105: Definitions
(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.
ILLUSORY PROMISES: applicable to commercial transactions in which one party, A, makes a real promise, which the other party, B, uses an expression that seems to be a real promise, but is not b/c it doesn’t shrink the realm of B’s choices.
- A would not be bound even though A did make a real promise b/c there is no consideration
- Really a unilateral contract designed to increase the probability of exchange (ex: book clubs offer free books for opportunity to sell future books)
- Creature of Classical Contract law; still on books but not used in Modern Contract Law
Wood v. Lucy, Lady Duff-Gordon (1917, New York) [The original Martha Stewart.] Lady Lucy makes agreement with Wood for him to have exclusive right to place her endorsements on designs of others, to place her own designs on sale, or to license others to market them in exchange for ½ of profits.
- Lucy says Wood never really promised to DO anything (like above case)
- Judge Cardozo was very ahead of his time and he did not restrict the contract to the actual language, but read it contextually (modern concept)
- Recognizes the “implied promise” of reasonable efforts b/c without such an implied promise, the transaction would not have any efficacy
- Thus, contract IS enforced.
Grouse v Group Health Plan (Minn., 1981) Action based on withdrawal of employment offer.
- Employment at Will Doctrine: In absence of contract to contrary, employment can be terminated at will by either party. Notion of severance pay or two weeks notice (which was part of Grouse) is not part of this doctrine at all.
- Based on capitalistic notion that businesses should be able to conduct business (including hiring and firing) as efficiently as possible.
- In employment offers, neither party truly promises anything b/c could fire employee at any time (or employee could quit at any time)
- Although this doctrine is often stated in these terms, it is much less often applied in these terms.
- (^) Court uses notion of Reliance (R § 90 – promise which Promisor should reasonably expect to induce action on part of Promisee and which does induce such action)
- Practically, this principle works in reverse. After promisee acts, consider if promisor could have reasonably expected such action(s)
- Reliance damages – designed to put injured party in as good position had promise never been made
- Get either Reliance OR Restitution damages, not both
- (^) Expectation damages could be possibility in some cases
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(c) threaten to sue in bad faith
(d) “the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient” [very subjective – any threat made in bad faith?] (2) A threat is improper if the resulting exchange is not on fair terms, and (a) threatened act would harm recipient and not sig benefit party making the threat (b) the effectiveness of threat is increased by prior unfair dealing by party (c) threatens to use power for illegitimate ends
- Threats to NOT enter into the contract are okay and common – duress must be an abuse of normal negotiating process
- Threats make the contract voidable. Not automatically invalid, but could be if victim wants out.
- (^) Loral v Austin has nothing to do with pre-existing duty b/c contract is already performed
Standard of Duress: (1) wrongful threat (2) threat deprives victim of free will (leaves no real alternative)
R § 175: When Duress by Threat Makes a Contract Voidable (1) If manifestation of assent is induced by an improper threat... that leaves no reasonable alternative, the contract is voidable by the victim. …
Angel v. Murray (1974, Rhode Island) [Duress] Garbage collector asks city counsel for more $ b/c of increase of 400 new units. Modification is enforceable. Difference from Loral and Lingenfelder?
- no threats to withhold legal duty
- no “hold up game”
- both parties mutually agree, it was “fair and equitable”
- circumstances of many new units was unanticipated at time contract was made
- this promise is enforceable even w/o consideration b/c of R § 89
- Courts will not enforce agreement made under coercion or duress, but
- Courts will uphold agreements when a party encounters unanticipated difficulties and the other party voluntarily agrees to pay additional compensation even if work is already part of the legal duty under original contract
R § 89: Modification of Executory Contract A promise modifying a duty under a contract not fully performed on either side is binding
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(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or (b) to the extent provided by statute; or (c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.
- if circumstances were anticipated at time of contract, it is simply a “bad bargain” and you’re stuck with it
- “fair and equitable” is very subjective, up to judge or jury to decide, informed by how parties conducted themselves
- UCC § 1-304: definition of “good faith” = honesty in fact (subjective) and the observance of reasonable commercial standards (objective) of fair dealing
- “Reasonable” means “objective” by a 3 rd^ person
UCC § 2-209: Modification, Rescission and Waiver (1) An agreement modifying a contract within this Article needs no consideration to be binding...
Past Consideration: enforceability of promises motivated by a moral obligation that pre-exists the promise
Mills v Wyman (1825, Mass) [Past Consideration] Son b/c’s very ill, taken care of by Wyman, Father offers to pay compensation after son dies and then backs out. Promise is NOT enforced.
- No consideration.
- Father not the one who received the benefit (son did)
- F is not responsible for son’s debts
Webb v McGowin (1935, Alabama) [Benefit previously received] Man goes “overboard” with heavy block to save McGowin’s life and injures himself. McGowin promises to pay $15/Q 2 wks for life in repayment. Promise IS enforced.
- No consideration, that promisor received benefit and the other injury doesn’t matter, they are not req for consideration (R § 79).
R § 86: Promise for Benefit Received (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. [importance of injury] (2) A promise is not binding under (1) if (a) the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; OR (b) to the extent that its value is disproportionate to the benefit.
(a)(b)* that party does not know (or has no reason to know)* of any different meaning attached by the other, and the other knows (or has reason to know)* the meaning attached by the first party [Lucy v Zehmer]
Frigalimment Importing Co v B.N.S. Intern. Sales Corp. (1960, NY) “The issue is, what is chicken?” Contract is NOT binding b/c:
- no mutual assent re meaning of chicken.
- again, ambiguity as to product
- meaning of chicken is “fundamental” to agreement
- Judge decided issue as matter of law. He did not say exactly WHAT chicken was, but said Π had burden of showing that “chicken” was used in the narrower rather than the broader sense, and they did not prove so. complaint dismissed with costs
D: There is a continuum b/w Formation and Interpretation Formation – question if there is a contract at all b/c of lack of mutual assent Interpretation – assume there is a contract, parties have already behaved as if there is a contract, but a question re the meaning of a term of the contract is disputed
- 19 th^ Century judges were very reluctant to say they were “interpreting” a contract. Thought they “knew” what contract meant based on the literal language. Did not consider context.
- Modern approach is to look at the context
- Impossible to cover all potential contingencies in a contract, have to figure out how to handle problems when they arise, how predict what court will do? (essence of being a lawyer)
Objective and Subjective Elements of Interpretation: (text)
- Classical contract law tended to be objective and standardized – “making of a contract does not depend upon the state of the parties’ minds; it depends upon their overt acts” - Williston: demonstrates objectivism of classical contract law: “meaning and effect of contract depends on the construction given the written language by the court , and the court will give that language its natural and appropriate meaning; and, if it is unambiguous, will not even admit evidence of what the parties may have thought the meaning to be” (text p. 384) - Learned Hand: “a contract has, strictly speaking, nothing to do with the personal, or individual intent of the parties”
- Modern contract law tends to be subjective and individualized: principles of interpretation should be responsive not only to objective elements but to the parties’ subjective intentions.
- Four central modern principles of interpretation:
- Principle I: If parties attach different meanings to an expression, neither party knows that the other attaches a different meaning, and the two meanings are not equally reasonable, the more reasonable meaning prevails. ■ (^) based on concept of liability for fault. ■ A is at fault if he uses a term that he should realize would lead a reasonable person in B’s position to understand that A means MM when in fact A means YY. Outcome depends upon the actual (subjective) meanings attached by the parties to the expression
R § 201: Whose Meaning Prevails (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (b) that a party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.
- Principle II: If the parties subjectively attach different meanings to an expression, neither party knows that the other attaches a different meaning, and the two meanings are equally reasonable, neither meaning prevails. ■ Both parties are equally fault-free or equally at fault, no reason why one meaning should prevail over another [Raffles v. Wichelhaus, Peerless ] ■ Result in Peerless is correct not because the parties said different things, but is correct because they meant different things
R § 20: Effect of Misunderstanding (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; OR (b) each party knows or each party has reason to know the meaning attached by the other
- Principle III: If the parties subjectively attach the same meaning to an expression, that meaning prevails even though it is unreasonable. ■ This principle reverses the strict objectivism of classical contract law under which the subjective intentions of the parties was irrelevant, even if mutually held. ■ Both parties may be at fault, but there is no injury ■ EX: both parties say purple = blue. Both are wrong, but it doesn’t matter.
R § 201: Whose Meaning Prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
- Principle IV: If the parties, A and B, attach different meanings, MM and YY, to an expression, and A knows that B attaches meaning YY, while B does not know that A
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- This is NOT a misunderstanding case, not like Raffles where both parties attached different meanings. The parents never anticipated these circumstances, have to interpret the language to figure out how to handle the situation.
- Court handles it by looking at intention of the parties, has 3 options:
- (^) F does have to pay [interpretation]
- F does not have to pay, OR [interpretation]
- Say there is no contract at all, b/c no meeting of the minds (a theoretical option, but not a practically viable option [formation issue]
- R § 204 – court can supply a term that is reasonable under the circumstances; a narrow and limiting doctrine, cannot use it arbitrarily
- Parties enter into contracts on their own free will, but courts will supply terms to “write the contract” when necessary
Berwick & Smith Co v Salem Press Inc. (1954, Mass) Printer (Π) sues author (Δ) for non-payment of publishing 5,000 volumes of a 2-vol set. Dispute has to the “unit” of sale – either 5,000 sets or 10,000 total books. Δ wants to pay for 5,000 sets at .561 each, and Π wants them to pay for 10,000 total books at .538.
- language is not super clear, if not in trade probably don’t know what it means
- Π knew what the language meant; arguable that Δ knew as well
- Court could have said as a matter of law that Π didn’t prove case (like Frigaliment), but didn’t. This court looked at the context of agreement to make sense of the language.
- “expression was not unambiguous” it was ambiguous, so the court can interpret the contract and settle it as a matter-of-law – for the judge to determine (very complex) as question-of-law
- (^) when issue goes beyond interpreting the language of an agreement, when there is evidence disputing the meaning, it becomes an issue for a jury to determine as a question-of-fact (for jury to decide on evidence of “usage of trade”)
- This case comes down to a usage of trade issue
- Can turn to other sources of information to determine meaning of a term:
R § 203: Standards of Preference in Interpretation Express terms Course of performance Course of dealing (R § 223) Usage of trade (R § 222)
- all sources of info provide info that parties’ didn’t expressly state in contracts, but we must assume they had it in mind
- EX: parties implicitly believe “blue = purple” and act as if this is so; thus, when see agreement that says “blue” we assume it really means “purple”
R § 202: Rules in Aid of Interpretation (1) Words and other conduct are interpreted in light of all circumstances: (2) Writing is interpreted as a whole, cannot take it out of context (3) Interpret terms using general meaning, but technical terms are used as they apply in the field (4) Any previous performance by parties is given great weight [course of performance] (5) Manifestations are interpreted as being consistent with each other (it should all fit together)
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R § 222: Usage of Trade (1) Needs to have “regularity of observance” (2) existence and scope to be determined as questions of fact (3) parties must know terms or have reason to know
UCC 1-303 (b) – Course of perf, course of dealing, and usage of trade
- If had no reason to know usage, not binding
Offer & Acceptance (pp. 403-443)
- R § 17: Requirement for a bargain – manifestation of mutual assent
R § 22: Mode of Assent: Offer and Acceptance (1) Offer by one party followed by acceptance by the other party (2) manifestation may be made even if cannot identify the offer/acceptance and even if moment of formation cannot be determined
R § 24: Offer Defined Manifestation of the willingness to enter into a bargain, so made as to justify another person in understanding that his assent is invited and will conclude the bargain.
- can be to a specified person or specified group or class of persons (R § 29)
- Offer can be made by either buyer or seller
- take all with grain of salt, “offer & acceptance” is not as important in contracts today as it used to be
Lonergan v. Scolnick (1954, California) [ad not an offer]
Parcel of land for sale, question of whether there is offer and acceptance Go through all communications to see if there is an offer: Ad (not offer), Π’s letter of inquiry (not offer), Δ’s response to inquiry by form letter (not offer), Π’s further inquiry (not offer), Δ’s second response (no offer, but Π interprets it as such), Π then responds with “acceptance” but the land has already been sold (this is an OFFER).
- ad is not offer b/c only one parcel of land, can’t be expected to be held liable to everyone who did not get opportunity to purchase the land, same deal with the form letter (only one parcel of land, multiple potential buyers); both are more an “invitation for an offer”
- have to ask if Π is justified in understanding letter as an offer – no, he isn’t. No clear offer of terms, haven’t even negotiated price of land
- Π cannot “accept” if there was never an offer
Lefkowitz v. Great Minneapolis Surplus Store (1957, Minnesota) [ad IS an offer]
- Where is the offer?
- Listing house for sale? No. B/c an “invitation for offers”, an advertised property for sale (same as Lonergan). Advertisement is generally not an offer
- Bid for $250K? Maybe. (court views as verbal negotiation)
- (^) Sellers verbal “OK” acceptance? Maybe.
- The issue of whether there was a valid contract (offer and acceptance) wasn’t raised at trial so Appellate court didn’t consider it
- Statute of Frauds – oral contracts for sale of land is unenforceable, so this wouldn’t be official offer and acceptance, needs to be in writing
- Court sees offer as the Δ sending the written P&S agreement to P (but not signed so might not be offer, but court looks at facts in light most favorable to P)
- Court then views Π response to P&S as a “counter offer” b/c of letter asking about the additional items in the house, thus no binding contract
- An interpretive issue – possible that court could have read letter differently, not as a counter offer (viewed $20K down payment as acceptance)
- Have to have definite and unequivocal acceptance of offer (unless parties say otherwise) [§ 39, §58]
- Counter-offers terminate offeree’s POA, but give it to original offeror – they now have power to say “yes, we accept your counter-offer,” but it takes original offer off the table unless they had manifested an intention to keep offer open
Classical contract law = “Mirror-image” rule: if acceptance varies from original offer in any way, no matter how minor, there is no contract
Modern contract law – rule has softened this a bit UCC 2-207 & § 59, okay to add new terms if acceptance does not depend upon the new terms
Dickenson v. Dodds (1876) [revocation]
- POA is terminated when offeror manifests an intention not to enter contract, or takes action inconsistent with offer – no meeting of the minds
- Must have mutual assent to have binding contract, if offeror has rescinded offer, there is no mutual assent (no continuing offer), but has to be communicated outwardly
- (^) Offeror has right to withdraw offer – can be communicated indirectly as long as offeree “acquires reliable information to that effect,” if no notice to offeree it is binding
- This case turns on Dickenson learning from his “agent” that Dodds intended to sell to someone else (revoking his offer to Dickenson). If Dickenson had no way of knowing the offer was revoked, it would have been a binding contract
§ 43 : POA is terminated when offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect
§ 52 : Offer can be accepted only by person whom it invites to furnish consideration
OPTION CONTRACTS
§ 87 Option Contract (NEW, only in Second Restatement)
(1) An offer is binding as an option contract if it (a) is in writing and signed by the offeror, has consideration to keep offer open , and proposes an exchange on fair terms within a reasonable time; OR (b) is irrevocable by statute [UCC]
(2) [reliance] An offer which the offeror should reasonably expect to induce action … on part of offeree before acceptance and which does induce such action … is binding as an option contract
UCC 2-205 : signed offer by merchant is not revocable, cannot exceed 3 months (unless stated otherwise)
§ 25 Option Contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer
EX: Give me $5 to keep the offer open until Friday at 9:00am. option contract
Classical contract law- option contracts created by using the “seal”, no longer available
- an offer for a unilateral contract could be revoked even though offeree had begun performance, as long as performance was not completed before revocation
Modern law: First Restatements reversed classical position
- 2 nd^ Restatement allows formation of option contract through: partial performance, consideration, or reliance on offer (e.g., general contractors)
§ 45: Option Contract Created by Part Performance or Tender (1) When offer invites acceptance by performance , an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offeror’s duty of performance under any option contract so created is conditional on completion of the invited performance
Drennan v. Star Paving (1958, California) [option contract, reliance] Subcontractor bids on job, but says he made a mistake on the price and wants out. Sub is bound by his offer.
- Sub’s bid is an “offer,” but general’s use of offer is not “acceptance”
- General relies upon the bid, the sub cannot revoke the offer creates option contract
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