Welcome to the July 2011 edition of Critical Path.
In this edition we:
- provide a brief update on recent developments in international arbitration in Australia;
- report on a recent case Ipex ITG Pty Ltd (in Iiq) v State of Victoria  VSC 480 where the Supreme Court of Victoria considered whether a request for tender was a mere “invitation to treat”;
- examine the New South Wales Court of Appeal's decision in Downer EDI Works Ltd v Parsons Brinckerhoff Australia Pty Ltd  NSWCA 78 and consider the implications it will have on the service of notices under the Building and Construction Industry Security of Payment Act 1999 (NSW);
- consider the Supreme Court's decision in Siemens Ltd v Origin Energy Uranquinty Power Pty Ltd and the interaction between the newly implemented Commercial Arbitration Act 2010 (NSW) and the Building and Construction Industry Security of Payment Act 1999 (NSW);
- investigate the impact of recent amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) on the 'contractual chain'; and
- in light of certain recent disasters such as the Queensland floods, we highlight the importance of contracting parties giving consideration to the form of 'force majeure' clauses during the contract negotiation phase.
We hope you find these articles interesting as well as informative. If you have any questions regarding their content, please contact us.
Partner and Editor of Critical Path
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Building and Construction Industry Security of Payment Amendment Act 2010 (NSW)
by Aaron Suine
The Building and Construction Industry Security of Payment Amendment Act 2010 (NSW) (Act) came into force on 28 February 2011. With other jurisdictions winding back their security of payment legislation, the Act may, in putting further protections in place for subcontractors and others at the ‘bottom of the contractual chain', have unintended consequences.
Payment withholding requests
The Act gives a person the right to issue a ‘payment withholding request’ (together with a statutory declaration from that person declaring that it ‘genuinely believes that the amount of money claimed is owed’ by the party it is in contract with) to a ‘principal contractor’ after it has issued an adjudication application.
To be a ‘principal contractor’ (using the scenario where a head contractor has not paid an amount claimed by a subcontractor, and that subcontractor has issued a payment withholding request to the project's developer or owner):
(a) the work performed or materials supplied by the subcontractor, for which the head contractor has not paid the subcontractor, must be part of or incidental to the work performed or materials supplied by the head contractor to the project's developer or owner; and
(b) the project's developer or owner needs to have not paid the head contractor all monies owing or which may become owing for work which is part of or incidental to the work performed by the subcontractor.
It is important to note that the work performed by the subcontractor may not necessarily have to be directly linked to the work performed by the head contractor to the principal; it need only be incidental to that work. It is unclear how this will be applied or work in practice, but it would appear to include circumstances where there is a right to recover under the subcontract which does not exist under the head contract.
Notification of principal contractor status
The person in receipt of a payment withholding request must, within 10 business days after receiving the payment withholding request, notify the subcontractor if it is no longer the ‘principal contractor’ for the claim.
A ‘principal contractor’ must retain, out of the money owed or which may become owing to the head contractor, the amount specified in the payment withholding request.
If the principal contractor does not retain such money, it will become jointly and severally liable to the subcontractor in respect of those monies. In these circumstances, any payments made by the principal contractor to the subcontractor can be recovered by the principal contractor from the head contractor as a debt due, however, this may not sufficiently protect the principal contractor if the head contractor is or becomes insolvent.
No obligation to pay
For as long as the principal contractor is required to withhold such monies, its obligation to pay the head contractor under the relevant contract is suspended to the extent that obligation relates to the monies withheld.
The obligation to withhold money lapses on the earlier of:
- the date the adjudication application for the payment claim is withdrawn (the principal contractor may rely in good faith on a statutory declaration from a head contractor declaring this);
- the date the head contractor pays the subcontractor the amount claimed to be due under the relevant payment claim (note this refers to the whole amount claimed; accordingly, if the head contractor makes a part payment (including where the adjudicator determines a lesser amount than that claimed by the subcontractor), the principal contractor’s obligation to withhold will only be removed with respect to amount paid by the head contractor – the principal contractor will need to continue to withhold the balance of the claimed amount);
- the date the subcontractor serves a notice of claim on the principal contractor under section 6 of the Contractor’s Debts Act 1997 (NSW) in respect of the payment claim; and
- 20 business days after the relevant adjudication determination is served on the principal contractor by the adjudication claimant (note the principal contractor’s obligation to withhold does not cease, and is not reduced, on the date of the adjudicator’s determination, even if a lesser amount is determined to be due to the subcontractor).
This will obviously have important cash flow implications for the head contractor and the progress of the project.
Some tips for dealing with the new regime
While aspects of the Act will hopefully be clarified in time, it is important that project developers, owners and head contractors have a process in place that enables immediate identification of a payment withholding request; prompt distribution of that request to appropriate personnel within the organisation; and, if necessary, timely response to and, if appropriate, compliance with, that request.
Further, head contractors, if the project’s developer or owner is in receipt of a payment withholding request from a subcontractor, should promptly discharge their payment obligations at the earliest possible time and inform the project’s developer or owner of that payment immediately.
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Disaster relief: A refresher on the principles relating to “force majeure” clauses
by Scott Francis and Hayley Schindler
Despite the best intentions, sometimes events which are beyond the reasonable control of contracting parties may mean that they are unable to perform their contractual obligations. In light of certain recent disasters, such as the Queensland floods, it is important for contracting parties to consider whether their interests are sufficiently protected and their exposure sufficiently limited.
Force majeure clauses are commonly used in construction contracts as a means of managing risk in anticipation of events which may occur that are beyond the parties’ control.
What is force majeure?
Force majeure clauses commonly operate to excuse or suspend a party’s obligation to perform where a supervening event occurs caused by forces (either human or natural) beyond the party’s control for which neither party is responsible and which makes performance impossible. A force majeure provision can operate to entitle both principals and contractors relief under their contractual obligations.
Application of a force majeure clause
A force majeure clause is a creature of contract and therefore will operate in accordance with the contracting parties’ intent, which is determined by the natural and objective meaning of the words of the clause construed in the context of the agreement as a whole.
In order to rely on a force majeure clause a number of elements will ordinarily need to be satisfied. Generally, these will include:
- Establishing that a "force majeure event" has occurred. Depending on the terms of the clause, a force majeure event may include “acts of God” (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, terrorism, riot, strike, lockout, ban, law, rule or regulation of any government or governmental agency;
- Demonstrating that the force majeure event has prevented, hindered or delayed a party’s ability to perform your obligations under the contract;
- Showing that performance of the contract has been physically or legally impossible (and not merely onerous or unprofitable);
- Demonstrating that non-performance is due to circumstances beyond the relevant party’s control. Relief might not be available if a "reasonable and prudent person/operator/contractor” would have taken pre-emptive steps that would have avoided the effects of the force majeure event;
- Ensuring that the mechanics of the force majeure clause have been followed (including any time bars); and
- Taking reasonable steps to mitigate the consequences of the force majeure event.
Limits to Relief
Force majeure clauses will generally grant relief from a party’s obligations only to the extent that performance of the contract has been prevented or delayed by the force majeure event. For example, a force majeure clause may:
- justify an extension of time for performance;
- provide an excuse for failure to perform;
- suspend or temporarily or finally discharge performance of the contract; or
- address cost consequences (logistics, expenditure, transport).
Relief is wholly predicated on the construction of the clause rather than principle based. Obligations that are unaffected will need to continue to be complied with as required by the contract.
Force majeure clauses do not operate as an exemption from liability. Relief from contractual liability is often temporary and can trigger more onerous obligations. For example:
- Suppliers commonly enter into a supply contract intending to supply a customer using a particular source. If the source is affected by a force majeure event, an effective force majeure clause will allow the supplier to avoid its obligations to supply. However, if the obligation is not that specific, the supplier may be required to supply (or use reasonable endeavours to supply) its customer from another source, assuming one is available. This might mean sourcing from a competitor or supplying at a loss.
- It is inevitable that when the force majeure event occurs (and even once it is resolved), a supplier's ability to supply will be limited and it may have multiple customer obligations to fulfill. An allocation clause will provide a clear and transparent mechanism for distributing supply (for example, pro-rata or priority treatment for valued customers, or rationalise limited supply between each customer). However, if a particular contract does not expressly provide for allocation between customers, it can sometimes be difficult to determine suppliers’ and customers’ rights.
- A force majeure clause may not protect parties in the aftermath of force majeure. Unless express provision has been made in the contract which sets out the parties’ obligations, a party may be required to “catch up” on the obligations which have not been performed by reason of the force majeure event, failing which it would be in breach of the contract and liable to the buyer for damages.
In light of the recent flood damage, it is likely that many parties have already sought to rely on force majeure provisions in their construction contracts. Whether or not the parties’ interests have been sufficiently protected is yet to be seen, but the fallout from the disaster will undoubtedly cause certain parties to re-think their level of protection or potential exposure when negotiating contracts in the future.
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International Arbitration Update: Significant developments post-2010 amendments
by Claire Bolster and Jesse Kennedy
In this article we provide a brief update on recent developments in international arbitration in Australia, revealing how the 2010 amendments to the international arbitration regime in Australia are already leading to lower costs and less court intervention for international arbitration.
- The Australian Centre for International Commercial Arbitration (ACICA) has become the authority able to appoint arbitrators where other agreed mechanisms fail.
- The enforcement of a Mongolian arbitration award by the Victorian Supreme Court evidences a move in Australia for minimal intervention and review by a court in enforcement proceedings.
- Indemnity costs may now be awarded as a matter of course where a party seeks to oppose the enforcement of an arbitral award.
- The enforcement of a Ugandan award in the Federal Court of Australia has highlighted that even poorly drafted arbitration agreements can still lead to enforceable awards in Australia.
ACICA becomes the appointing authority
On 2 March 2011, the International Arbitration Regulations 2011 (Cth) (Regulations) came into force, prescribing ACICA as the sole competent authority to perform the functions set out in arts 11(3) and 11(4) of the UNCITRAL Model Law on International Commercial Arbitration (Model Law).
The effect of the Regulations is that where:
(a) a party fails to appoint an arbitrator;
(b) the parties cannot agree on the appointment of an arbitrator;
(c) the party-appointed arbitrators cannot agree on the appointment of a third arbitrator; or
(d) an arbitral institution fails to appoint an arbitrator as required,
a party to an arbitration in Australia can apply to ACICA (instead of a court) to appoint the arbitrator. This avoids the costs and delays associated with court applications.
Enforcement of a Mongolian award
On 28 January 2011, the Supreme Court of Victoria (Croft J) enforced a Mongolian award under the new regime provided in s 8 of the International Arbitration Act 1974 (Cth) (IAA). In doing so, the Court (Altain Khuder LLC v IMC Mining Inc  VSC 1) covered a number of topical, complex and controversial issues on the application of the New York Convention.
In summary, Croft J held:
- A party seeking to enforce an award does not need to prove that the award or arbitration agreement is binding or valid; all they need to do is comply with the procedural requirements in the IAA and the relevant court rules.
- A party who seeks to resist the enforcement of an arbitral award bears a “very heavy burden” in doing so and must present “clear, cogent and strict proof” that one of the grounds for refusing enforcement of an award found in the New York Convention (as enacted in Australia by s 8 of the IAA) applies.
- The proper law of the contract is not necessarily the proper law of the arbitration agreement. It is therefore important to identify the law of the arbitration agreement, as this law governs the validity of the arbitration agreement, including the jurisdiction of the arbitral tribunal.
- The decision of the United Kingdom Supreme Court in Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan  UKSC 46 should not be read as allowing a court in an enforcement proceeding to re-open and re-litigate issues already raised before and dealt with by the tribunal.
- Where the courts of the seat of arbitration have verified an award and a party has had sufficient opportunity to argue the tribunal lacked jurisdiction both before the tribunal and the courts of the seat of arbitration, an estoppel will ordinarily arise preventing that party from arguing the tribunal lacked jurisdiction before a court seeking to enforce the award.
The decision has been appealed to the Victorian Court of Appeal.
Indemnity costs awarded against party resisting enforcement of foreign arbitral award
Following the decision on the enforcement of the Mongolian award, Croft J awarded costs on an indemnity basis against the party resisting enforcement (Altain Khuder LLC v IMC Mining Inc (No 2)  VSC 12).
Should other courts within Australia follow his Honour’s decision, a party seeking enforcement of an award in Australia has the potential to recover all its costs in doing so, not just party/party costs.
Conversely, parties seeking to resist enforcement of an arbitral award in Australia should only do so in circumstances where they have a good case for refusing enforcement. Otherwise, they may be subject to a significant costs order awarded against them on top of any award enforced by the court.
Federal Court enforces Ugandan award
Having been conferred with the relevant jurisdiction under the recent amendments to the IAA, the Federal Court (Foster J) has recently enforced a Ugandan award (Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd  FCA 131). The important points to come from this case are:
- The enforcement of an award will only be contrary to public policy where it “would violate the forum state’s most basic notions of morality and justice”.
- Arbitration agreements that contain no details other than certain disputes must be submitted to arbitration will not be void for uncertainty if the law of the seat of arbitration “fills the gaps” on details required for an effective arbitration (eg, procedure for appointment of arbitrators, place of arbitration, rules of arbitration etc).
The effect of the decision of Foster J is to highlight the importance of choosing an appropriate seat of arbitration. Although no substitute for a properly drafted arbitration agreement, it is important to ensure that the arbitration laws of the chosen seat of arbitration adequately deal with and protect the procedures and mechanisms of arbitration that are necessary for an efficient, timely and cost-effective resolution of the dispute.
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Siemens Ltd v Origin Energy Uranquinty Power Pty Ltd
 (23 March 2011) Supreme Court of New South Wales, His Honour Justice Ball
by Rob Buchanan and Daniel Vicano
Siemens and Origin entered into a contract by which Siemens agreed to provide four gas turbines and associated equipment and services in connection with the construction of the Uranquinty power station located in Wagga Wagga, New South Wales (Contract).
During the project, Siemens served payment claims on Origin pursuant to the Building and Construction Industry Security of Payments Act 1999 (NSW) (SOP Act). The payment claims the subject of the action were dated 7 January and 6 February 2009. Origin did not provide payment schedules in response to those payment claims within the time allowed by the SOP Act.
A number of disputes arose under the Contract. The parties agreed to amend the dispute resolution clause of the Contract so that “any dispute arising prior to 20 December 2010, is hereby referred to arbitration.” Just over a month later, Siemens commenced proceedings against Origin to recover the amounts that were the subject of the two payment claims as a debt due under section 15(2)(a)(i) of the SOP Act.
Origin sought to defend the proceedings on the basis that there is no relevant reference date and that it was induced not to serve a payment schedule by reason of Siemens' alleged misleading and deceptive conduct. Origin then applied for the stay of the proceedings under section 8 of the new Commercial Arbitration Act 2010 (NSW) (CA Act).
The stay application raised two key questions. The first was whether the parties had agreed to refer the dispute arising under section 15(2)(a)(i) of the SOP Act to arbitration. The second was whether that dispute is arbitrable.
The Court considered that the parties had agreed to refer the dispute to arbitration. In arriving at that conclusion, the Court took into account the fact that the arbitrators were bound to apply New South Wales law and that the nature of the disputes that could be submitted to arbitration was expressed very broadly. That the dispute had arisen out of the SOP Act was held not to make it any less concerned with or connected with the Contract or its subject matter. This is consistent with the dual-track nature of the SOP Act which is designed to work in parallel with the Contract to ensure swiftly enforceable rights to interim payment. The Court found that the dispute the subject of the proceedings fell within the definition of “dispute” under the amended arbitration agreement, and that it arose prior to 20 December 2010; as such, subject to the question of arbitrability, it would be appropriate to stay the proceedings to arbitration.
As to arbitrability, the Court's view was that an arbitration agreement would be “null and void, inoperative or incapable of being performed” for the purposes of section 8 of the CA Act if the subject matter is not capable of settlement by arbitration under the laws of New South Wales. The Court identified aspects of the SOP Act which suggest that the legislative regime cannot be made the subject of arbitration, including the policy behind the SOP Act for a swift mechanism allowing contractors to recover progress payments and the fact that the legislature established a public, statutory dispute resolution scheme in order to achieve that goal. Other legislation containing dispute resolution provisions requiring reference to the courts or specialist tribunals with the effect that such disputes are unarbitrable was compared with the SOP Act. The Court concluded that arbitration cannot be a substitute for an adjudication under the SOP Act and therefore, that the dispute is not arbitrable. The Court also noted that the supervisory jurisdiction the court exercises over the adjudication process cannot be the subject of an arbitration.
The Court held that a provision of an arbitration agreement that prevents a party from exercising a right under section 15(2)(a)(i) is void under section 34 of the SOP Act.
The practical outcome of this decision is that a party is not able to seek a determination of issues in relation to the SOP Act through arbitration and must rely on both the adjudication process and the supervisory nature of the Courts in order to exercise its rights under the Act.
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Serving an “ordinary place of business” under the NSW security of payment legislation
Downer EDI Works Pty Ltd v Parsons Brinckerhoff Australia Pty Ltd  NSWCA 78
by Rob Buchanan and Daniel Vicano
The recent decision of the New South Wales Court of Appeal in Downer EDI Works Ltd v Parsons Brinckerhoff Australia Pty Ltd  NSWCA 78 has some important implications for the service of notices under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Act”).
Parsons Brinckerhoff Australia Pty Ltd (“the Respondent”) entered into a contract with Downer EDI Works Ltd (“the Appellant”) to provide design and consultancy services in relation to the upgrade of a passenger rolling stock production facility at Glendale. On 1 April 2010, the Respondent served a payment claim to the Appellant by facsimile to the Melbourne and Broadmeadow offices of the Appellant. The Melbourne office was the Appellant’s registered office and the Broadmeadow office was a site office in which the Appellant administered and undertook rail related projects (not including, however, administration of the Glendale Project).
The issue at trial was whether either the Melbourne or Broadmeadow office (or both) could be deemed the Appellant’s “ordinary place of business” for the purpose of service of a payment claim in accordance with
s 31(1)(c) of the Act. At first instance, Hammerschlag J held that the person’s ordinary place of business includes any place where “the person usually engages in activities which form a not insignificant part of that person’s business”. His Honour determined that both the Melbourne and Broadmeadow offices could be categorised as an “ordinary places of business” of the Appellant.
The Appellant appealed the decision of Hammerschlag J to the Court of Appeal.
The main issue in the appeal was the interpretation of the term “ordinary place of business” for the purpose of s 31(1)(c) of the Act and whether the scope of the meaning of “ordinary place of business” should be read down to mean the place of business which had the “closest connection” to the works the subject of the relevant construction contract. The Appellant argued that the first instance decision could mean that a payment claim served in relation to construction works on the east coast would be validly served on a construction office on the north west coast with no connection with the works. This would of course have significant implications in circumstances where the receiver has only 10 business days in which to issue a payment schedule.
The Court of Appeal agreed with the trial judge that there may be more than one ordinary place of business for the purpose of the Act. Giles J held there was no need to confine the provision to require service on the ordinary place of business with the “closest connection” to the transaction. However, he considered “it may be that [the places of business are required to] have at least some relationship with the construction contract.”
His Honour Hodgson JA agreed with Giles J and stated in his decision that, “I am inclined to think that the person’s “ordinary place of business” within s 31(1)(c) may be limited to the place or places where the person ordinarily carries on that business; and thus…may not extend to every place where the person carries on any kind of business.”
Accordingly, the Court held that the payment claim was validly served on the Appellant by service on the Appellant’s Melbourne office.
Implications for service under the Act
The effect of the Court of Appeal’s decision confirms that there may be more than one ordinary place of business for the purpose of service under the Act. It has arguably narrowed the meaning of “a person’s ordinary place of business” because the place may need to have at least some relationship with the construction contract.
It is recommended that persons who have been served with a payment claim take a cautious approach and provide a valid payment schedule within the time requirements of the Act regardless of the location in which the payment claim is served. Any potential issues regarding service of the payment claim should be raised in a valid payment schedule.
Although the decision is related to the NSW version of the security of payment legislation, it may be applied in other states which have similar service provisions contained in their version of the legislation.
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When does a request for tender become a “process contract”?
Ipex ITG Pty Ltd (in liq) v State of Victoria  VSC 480
by Rowena Kennedy and Hayley Schindler
In Ipex ITG Pty Ltd (in Iiq) v State of Victoria  VSC 480 the Supreme Court of Victoria considered whether a request for tender (“RFT”) was a mere “invitation to treat” or whether it amounted to a tender process agreement obliging the Victorian State Government to comply with the terms of the tender process.
The claim was brought by Ipex, an unsuccessful tenderer who claimed that the Victorian Government had breached its contractual duty in relation to the evaluation of tenders for the Parleynet Project in 2003.
The RFT contained a great deal of information including:
- an overview of the selection process and evaluation criteria;
- terms and conditions; and
- information regarding Parliament’s existing IT environment together with Parliament’s requirements.
The RFT made it clear that the requirements went beyond the supply of hardware and called for an innovative approach. The Victorian Government also had a Tender Evaluation Plan (which was not provided to tenderers) which set out the process to be followed to evaluate the tenders.
Ipex’s tender focused on providing a low cost system based on information it had heard from an unofficial source. Ipex's tender was not successful despite being the cheapest tender.
Was there a binding process contract?
The answer to this question will depend on the intention of the parties, as disclosed by the tender documents. In other words, was there an intention to be contractually bound to comply with the proposed tender process?'
Sifiris J reviewed the authorities and found that the “courts are more willing to find process contracts as governing the relationship of the parties pre-award in cases where a timeline and detailed process, including evaluation criteria, are set out in such a way that suggests that an obligation (promissory in nature) to follow such timeline and process has been incurred”.
His Honour concluded that each tender must be considered on its own facts. This includes the RFT and/or related documents, and the relevant context and circumstances in determining whether there is an intention to create an immediately binding contract as to process.
The court found that the RFT documents were intended to be legally binding as a process contract and did not just simply provide information about the tender, because the RFT contained detailed evaluation criteria. As the State's RFT stated “will” and “must” it suggested that there was a “commitment, promissory in nature, to abide by a process particularly in relation to the evaluation of tenders”.
A binding contract may therefore arise between the party calling for tenders and a tenderer where there is an intention to be bound shown by a prescriptive tender evaluation process.
Despite the Court finding that a process contract existed between lpex and the Victorian Government, lpex failed to show that the Victorian Government had breached the terms of the contract. The Court found that the obligation to assess tenders on the basis of value for money (which was a requirement set out in the RFT for a successful tender), did not compel the Victorian Government to select the cheapest tender. The evaluation process sought to identify the tender response that offered the best solution at the best price and just because the lpex tender was the cheapest did not mean that it was best value for money.
Implications of the Ipex decision
Bidders should bear in mind that they may be disqualified from tendering if their tenders do not strictly comply with the requirements of an RFT, particularly where it is considered a process contract.
Principals should carefully draft RFTs and other tender documents so as not to inadvertently create a process contract, or if one is intended to be created, to ensure that certain discretions and flexibility are retained including the ability not to be bound to the lowest priced tenderer.
Helpful tips in tendering
- Consider whether the RFT and tender process gives rise to a process contract.
- An RFT may become a binding process contract if it prescriptively sets out the requirements to be complied with by the tenderers in submitting their tenders and the evaluation criteria (and there is no drafting to indicate a process contract is not the intention).
- Understand the implications of the tender conditions set out in the RFT.
- Ensure flexibility in the choice of tender and minimise the risk of breaching the tender process contract by ensuring that the RFT clearly reserves a principal’s rights to:
- change the tender evaluation process;
- to reject any or all of the tenders; and
- to enter into further negotiations with any tenderer.
- Following distribution of an RFT, a principal should be careful to ensure that the tender process and evaluation comply with representations within the tender documentation and any representations made in communications with tenderers.
- Ensure that all employees involved in the tender process are trained in what representations can be made about the tender process.
- If considering departing from an evaluation process set out in the RFT, ensure that there is a right to do so in the RFT or that the departure will not be materially prejudicial to the tenderers relying on the representations made in the RFT.
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