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contract_laws:part-1:consideration

Consideration

Introduction

According to Section 25 of Indian Contract Act, an agreement made without consideration is void, subject to certain exceptions. Consideration means something in return for the promise. It may be either some benefit conferred on one party or some detriment suffered by the other. It is the price of the promise for each party.

Definition of Consideration

Section 2(d) of Indian Contract Act, 1872 defines consideration as “when at the desire of the promisor, the promisee or any other person

  • has done or abstained from doing, or [Past Consideration]
  • does or abstains from doing, or [Present Consideration]
  • promises to do or abstain from doing something, [Future Consideration]

such act or abstinence or promise is called a consideration for the promise”.

The definition requires the following essentials to be satisfied in order there is valid consideration-

  1. Consideration to be given ‘at the desire of the promisor’.
  2. Consideration to be given ‘by the promisee or any other person’.
  3. Consideration may be past, present, future, in so far as the definition says that the promise:
    1. Has done or abstained from doing, or
    2. Does or abstains from doing, or
    3. Promises to do or to abstain from doing, something.
  4. There should be some act, abstinence or promise by the promise, which constitutes consideration for the promise.

Blackstone – “consideration is the recompense given by the party contracting to the other”.

Cheshire and Fifoot – “a price for the promise”.

Sir Frederick Pollock - “consideration is the price for which the promise of the other is bought and the promise is thus given for value is enforceable”.

Patterson – “consideration means something which is of some value in the eye of law. It may be some benefit to the plaintiff and some detriment to the defendant.”

Consideration is a quid pro quo i,e something in return it may be –

  1. some benefit right, interest, loss or profit that may accrue to one party or,
  2. some forbearance, detriment, loss or responsibility suffered on undertaken by the other party [currie V mussa].

Example

  1. ‘P’ aggress to sell his car to ‘Q’ for Rs.50,000 Here ‘Q’s Promise to pay Rs50,000 is the consideration for P’s promise and ‘P’s promise to sell the car is the consideration for ‘Q’s promise to pay Rs.50,000.
  2. ‘A’ promises his debtor ‘B’ not to file a suit against him for one year on ‘A’s agreeing to pay him Rs.10,000 more. Here the abstinence of ‘A’ is the consideration for ‘B’s Promise to pay.

Consideration at the desire of the promisor

Consideration must have been given at the desire of the promisor, rather than voluntarily or at the instance of some third party. Example: A saves B’s goods from a fire without being asked to do so. A cannot demand payment for his service.

In Durga Prasad vs. Baldeo, Plaintiff constructed few shops in a market at the instance of the collector of that place. Defendant occupied one of the shops in the market. Money for the construction of the market was spent by the plaintiff, the defendants, in consideration thereof, made a promise to pay to the plaintiff commission on the articles sold in that market. Defendant failed to pay the promised commission. Held: Consideration for promise to pay the commission for construction of the market was not at the desire of the defendant but on the order of collector. Therefore, held that since the consideration did not move at the desire of the defendant they were not liable in respect of the promise made by them.

Subscription for a charitable

purpose A promise to contribute an amount for a charitable purpose may not be enforceable because against this promise there may be no consideration. But a promise to pay subscription becomes enforceable when definite steps have been taken on the faith of the promised subscription. In Kedarnath v. Gorie Mohammed, There was a proposal to construct a Town Hall at Howrah provided sufficient funds would be available by way of subscription. The defendant was one of the subscribers, having promised to pay Rs.100 by signing his name in the subscription book for the purpose. On the faith of the promised subscriptions, the plaintiff engaged a contractor for the purpose of the construction and started a construction work. The defendant refused to pay his subscription on the ground that he was not legally bound by his promise because there was no consideration for the same. Held: That engaging a contractor and starting the construction on the faith of the promise was sufficient consideration to enforce the promise and, therefore, the defendant was bound to pay the amount promised by him.

Consideration by promisee or any other person

According to Indian law consideration may be given by the promisee or any other person. In India there is a possibility that the consideration for the promise may move not from the promisee but a third person, who is not a party to the contract. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promisee or from any other person. In English law, consideration should move from promisee only.

In Chinnaya vs. Ramaya, A, an old lady, granted an estate to her daughter (defendant) with a direction that the daughter should pay an annuity of Rs. 653/- to A’s brother (plaintiff). On the same day the defendant made a promise to the plaintiff that she would pay the annuity as directed by A. The defendant failed to pay the stipulated sum. In an action against her by the plaintiff she contended that since the plaintiff himself had furnished no consideration, The Madras High Court held that in this agreement between the defendant and plaintiff, the consideration has been furnished by the defendant mother and that is enough consideration to enforce the promise between the plaintiff and the defendant.

Privity of Contract

The doctrine of privity of contract means that only those persons who are parties to the contract can enforce the same; a stranger to the contract cannot enforce a contract even though the contract may have been entered into for his benefit. Example: If in a contract between A and B some benefit has been conferred upon X, X cannot file a suit to enforce the contract because A and B are the only parties to the contract whereas X is only a stranger to the contract. In India a person may not have himself given any consideration but he can enforce the contract if he is a party to the contract, because according to the Indian Law consideration may be given either by the promisee or even a third party. That does not affect the rule of privity of contract.

English Law

  • Dutton Vs. Poole, A intended to sell his wood to make a provision for the marriage expenses of his daughter. The defendant, A’s son requested A not to sell the wood and in return made a promise to his father that he would pay 1,000 pounds to A’s daughter, The father forebore to sell the wood but the defendant did not pay the promised amount to the plaintiff. Held: It is true that the defendant, promised to father and father furnished consideration for the promise. The plaintiff, was neither privy to the contract nor to the consideration. But it was equally clear that the whole object of the agreement was to provide a portion to the plaintiff. It would have been highly inequitable to allow the son to keep the wood and yet to deprive his sister of her portion. He was accordingly liable. A person, who is not a party to the contract but is intended to be the beneficiary under the contract and is nearly related to the promisee, has a right of action.
  • Tweddle Vs. Atkinson, After the marriage of the plaintiff, there was a contract in writing between the plaintiff’s father and the girl’s father that each would pay a certain sum of money to the plaintiff and the plaintiff would have a right to sue for such sums. Plaintiff brought an action against girl’s father to recover the promised amount. Held: Plaintiff could not sue for the same. As the plaintiff was both a stranger to the contract as well as stranger to consideration and he could not enforce the claim. It laid foundation for doctrine of “privity of contract” which means that a contract is a contract between the parties only and no third person can sue upon it even if it is made for his benefit.

Two fundamental principles

  • Consideration must move from promisee and promisee only. If consideration moved from any person other than promisee then promisee becomes stranger to the contract as such he cannot enforce the contract.
  • A contract cannot be enforced by a person who is not a party to contract even though it is made for his benefit. He is a stranger to contract and hence can claim no rights under it.

Indian law – Privity of Contract

The rule that “privity of contract” is needed and a stranger to contract cannot bring an action is equally applicable in India as in England. Even though under the Indian Contract Act the definition of consideration is wider than in English Law, yet the common law principle is generally applicable in India, with the effect, that only a party to the contract is entitled to enforce the same. In Jamnadas vs. Ramavtar , A had mortgaged some property to X. A sold this property to B. B having agreed with A to pay off the mortgage debt. X brought an action against B to recover the mortgage money. It was held by the Privy Council that since there was no contract between X and B, X could not enforce the contract to recover the amount from B.

Exceptions to Privity of Contract

Trust or Charge

While only a party to a contract who can sue on it and no such right is conferred on a third party, it was also stated that “such a right may be conferred by way of property, as, for example, under a trust.” The basis of an action by the third party is actually not enforcing the contract but the right conferred by a particular contract in favour of a third party in the form of trust etc. For example, in a contract between A and B, beneficial right in respect of some property may be created in favour of C. In such a case C can enforce his claim on the basis of the right conferred upon him. In Khwaja Muhammad Khan vs. Husaini Begum, An agreement between the fathers of a boy and a girl that if the girl married a particular boy, the boy’s father would pay certain personal allowance known as Kharch-i-pandan (betel-box expense) or pin money to the plaintiff. It was also mentioned that a certain property had been set aside by the defendant and this allowance would be paid out of the income of that property. The plaintiff married the defendant son but the defendant failed to pay the allowance agreed to by him. Plaintiff brought an action against the defendant. Held: The basis of the plaintiff’s claim being a specific charge on the immovable property in her favour she is entitled to claim the same as a beneficiary, and as such, the common law rule of privity is not applicable.

Conduct, acknowledgement, or admission

If a party by conduct, acknowledgement, or admission recognizes the right of other to sue him, he may be liable on the basis estoppel. In Narayani Devi vs. Tagore Commercial Corporation Ltd., in a contract between the plaintiff husband, and defendant, defendant agreed

  • to pay certain amounts to the pt.’s husband during his lifetime and
  • thereafter to pay the same to plantiff. for her life.
  • On death of plaintiff husband, defendant -
    • made certain payments to the pt., in pursuance of the agreement,
    • had asked for the extension of time to pay, and
    • called the plaintiff, to execute certain documents in this connection.
  • On suit for recovery of the same defendant take the plea of privity of contract.

Held: Defendant have created such privity with the plaintiff, by their conduct, by acknowledgement and by admission, that the plaintiff is entitled to her action even though there was no privity of contract between the plaintiff, and the defendant.

Marriage settlement, partition or family arrangement

Where, under a family arrangement, the contract is intended to secure a benefit to a third party he may sue in his own right as a beneficiary. Eg., on the partition of joint family property between the male members, a provision is made for the maintenance of the female members of the family. Eg., agreement of marriage by father of a girl, Two brothers agreeing to invest a sum for the benefit of mother, a daughter and her husband agreeing with her father to provide maintenance to mother on receipt of property, promise by a husband to his wife’s father to treat her well and to provide separate dwelling house in case of default.

Covenants running with the land

Rule of privity is modified by the principles relating to transfer of immovable property A person purchasing a land with the notice that the owner of the land is bound by certain duties created by an agreement affecting the land shall be bound by them, although he was not a party to it. In Smith & Snips Hall Farm ltd., v. River Douglas Catchment Board, Defendant agreed with certain land owners adjoining a stream to improve the banks of the stream and to maintain them in good condition and landlords paid costs and subsequently one of the landlords sold it to plaintiff and board negligently maintained banks, which burst and flooded plaintiff land. Held: Board was liable. Whole arrangement was to benefit the lands whoever be the owners.

Consideration may be past, executed or executory

Indian Contract Act recognizes three kinds of consideration, viz., Past, Executed and Executory. It says that when at the desire of the promisor, the promise and the other person:

  1. Has done or abstained from doing, ( the consideration is past)
  2. Does or abstains from doing, ( the consideration is executed or present)
  3. Promises to do or to abstain from doing, ( the consideration is Executory or future).

Past Consideration

Past Consideration means that the consideration for any promise was given earlier and the promise is made thereafter. It is, of course, necessary that at the time the act constituting consideration was done, it must have been done at the desire of the promisor. For eg. I request you to find my lost dog. After you have done the same, if I promise to pay you Rs.100 for that, it is a case of past consideration. For my promise to pay you Rs.100 the consideration is your efforts in finding my lost dog and the same had been done before I promised to pay the amount. Here the consideration has been given at my request, because it is only when I request you to find the dog.

Past services voluntarily rendered

Indian Contract Act recognises only such consideration which has been given at the desire of the promisor, rather than voluntarily. If consideration has been given voluntarily, it is no consideration.

For example, if my dog has been lost and without any request from me to find the same, you find that on your own and deliver the dog to me. This is a case of past services rendered voluntarily. I promise to pay Rs. 100 to you after you have rendered these services,- can such an agreement been forced ? Yes it comes in the exception.

Executed or present consideration

When one of the parties to the contract has performed his part of the promise, constituting the consideration for the promise by the other side it is executed consideration. A advertises an offer of reward of Rs. 100/- to anyone who finds out his lost dog and brings the same to him. B finds the lost dog and brings the same to him. When B did his part of the job that amounted to acceptance of the offer, resulting in a binding contract under which A is bound to pay Rs. 100/- to B, and also simultaneously giving consideration for the contract. The contract in this case is said to be “executed”. Executed consideration is different from past consideration – executed consideration is the consideration provided simultaneously with the making of the contract. In case of past consideration at the time of providing of the consideration the promise is nonexistent.

Executory or future consideration

When one person makes a promise in exchange for the promise by the other side, the performance of the obligation by each side to be made subsequent to the making of the contract, the consideration is known as Executory. A agrees to supply certain goods to B, and B agrees to pay for them at a future date, this is a case of executory consideration.

Consideration need not be adequate

A contract supported by consideration is valid even though it is inadequate. Explanation II to section 25, “An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by Court in determining the question whether the consent of the promisor was freely given.” The burden is on the party pleading absence of free consent. Inadequacy of consideration is by itself is not ground for treating the contract as invalid but it may be a factor which the court may take into consideration to know whether the consent of a party was free. For eg. A agrees to sell a horse worth Rs.1, 000 for Rs.10. A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A’s consent was freely given.

Consideration must be real, of some value

Although it is not necessary that consideration should be adequate, it is, however, necessary that it should be real and should not be unsubstantial. In White v. Bluett A son used to complain to his father that his brothers had been given more property than him. The father promised that he would release the son from a debt if the latter promised stopped complaining. After the father’s death an action was brought by the executors to recover the debt. The son contended that the father had made a contract to release him from the debt in consideration for his promise not to bore his father. Held: Promise by son not to bore his father with complaints in future did not constitute good consideration for the father’s promise to release him, and, therefore, the son continued to be liable for the debt. Promise not to bore the promisor is not enough to constitute consideration. Performance of an existing duty is no consideration Consideration is a promise to do something more than what a person is already bound to do. Doing of something which a person is already legally bound to do is no consideration.

Collins v. Godefroy Plaintiff received a summons to give evidence in a case. Thereafter the defendant, promised to pay to the plaintiff, some money for the trouble which was to be taken by him in appearing in that case. Plaintiff sued defendant to recover the amount promised by defendant. Held – Plaintiff having received the summons was already under a public duty to give evidence, and therefore, the promise by the defendant to pay did not constitute consideration for the promise.

Performance of Contractual duty

  1. Pre-existing contract with the promisor.
  2. Pre-existing contract with third parties.

Performance of existing contractual duty

If the plaintiff is already bound to perform a particular contractual duty owed to the defendant, his promise to pay something additional for the same promise is no consideration.

Stilk v. Myrick, Two sailors having deserted in the course of a voyage, the captain of the ship promised to distribute the wages of those two sailors amongst the other members of the crew if they would work the ship home. Held: The members of the crew being already duty bound to work the ship home, there was no consideration to pay the additional amount and hence the promise to pay that amount could not been forced.

Performance of an existing duty owed to a third party

Shadwell v. Shadwell, The plaintiff had already promised to marry one Ms. Nicholl. The plaintiff’s uncle wrote a letter to the plaintiff as under: “I am glad to hear of your intended marriage with Ellen Nicholl; and, as I promised to assist you at starting, I am happy to tell you that I will pay to you 150 pounds yearly during my life or until your annual income derived from your profession of a Chancery barrister shall amount to six thousand guineas. Thereafter the plaintiff married Miss Nicholl. He could not earn 600 guineas from his profession but no annuity was paid by his uncle to him. After his uncle’s death he brought an action against his executors to recover the amount promised to be paid by his uncle to him. It was decided by a majority that the promise was enforceable as it was supported by consideration. Consideration in this case being a benefit to the uncle as marriage of a near relative could be of interest to him, and also detriment to the plaintiff as he might have incurred pecuniary liabilities on the faith of the promise.

The rule in Pinnel’s case

According to English Law laid down in Pinnel’s case, an agreement to pay smaller sum in lieu of a larger sum is not binding, as the agreement is without consideration. It means that in spite of a promise to pay and receive a smaller amount than due, the promisor can claim the whole of the amount due.

Exceptions to the rule in Pinnel’s case

1. Payment in kind

The gift of a horse, hawk or robe, etc. in satisfaction (of a claim for money) is good. For it shall be intended that a horse, hawk or robe, etc. might be more beneficial to the plaintiff than the money in respect of some circumstance, or otherwise the plaintiff would not have accepted it in satisfaction.

2. Payment before due date

The payment and acceptance of the smaller sum of money than originally due in satisfaction of the whole, before the payment is due, “for peradventure parcel for it before the day would be more beneficial to him than the whole at the day”. It means that the payment on an earlier date constitutes sufficient consideration to discharge a part of the debt.

3. Part payment by a third party

Payment of a part of the sum due, by a third party, has been recognized to be enough to discharge the whole of the debt. If one party has accepted part payment from a third party, he cannot subsequently sue for the balance of the amount.

4. Composition with the creditors

An agreement between a debtor and a single creditor for payment of lesser amount than due will come under the ban in Pinnel’s case, but an agreement between a debtor and creditors will come under the exception.

5. Doctrine of promissory estoppel

This is an equitable estoppel preventing a person from denying what he asserted earlier. The person making the representation or promise becomes bound by the same, on the basis of the law of estoppel if another person has acted on the faith of such promise or representation. The promise is enforceable at the instance of the promisee notwithstanding that there is no consideration for the promise.

Indian law

In India, the promisee may accept in satisfaction of the whole debt an amount smaller than that. No consideration is needed for such a promise. S.63 “Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.” Illustrations A owe B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged.

Forbearance to sue

Forbearing to sue or abstaining from enforcing a claim is good consideration for a promise to pay, or do some other act. Forbearance to sue constitutes consideration in so far as the delay in the proceedings is a benefit to the person intended to be sued. Promise to forbear may be implied and it may be forbearance only for some unspecified time.

Callisher v Bischoffsheim

Doubtfulness of original claim not relevant A person promised not to sue for an agreed time, provided that some bonds were delivered to them. When the bonds were not delivered, the person claimed damages for breach of that agreement. The other person said that, as the money had not been due in the first place, (assumed for the purpose of these proceedings that that was true). They could not enforce the delivery of the bonds. The court took the view that if D's claim were accepted, no agreement to compromise a doubtful claim could be enforced. If a party to an action believes bona fide that there is a chance of success, then there is reasonable ground for suing and the forbearance will constitute good consideration. The other party obtains an advantage of being free from the necessity to defend the action. If the validity of the claim is doubtful but the plaintiff believes that he has a good cause of action, forbearance to sue in such a case is good consideration. If a party made a claim which they knew to be unfounded and then an attempt to derive an advantage by compromise would be fraudulent. Essential to understand that there are in fact 2 contracts - the initial contract which is the subject of the dispute, and then the 2nd contract which is intended to settle the dispute arising from the first. The question is whether there is consideration for the 2nd contract, and what effect this has on the obligations arising from the first.

No consideration no contract Exceptions

Promise due to natural love and affection [ S.25(1)]

When the promise is made in favour of a near relation on account of natural love and affection, the same is valid even though there was no consideration for such a promise. The following are requirements:

  • The parties to the agreement must be standing in a near relationship to each other.
  • The promise should be made by one party out of natural love and affection for the other.
  • The promise should be in writing, and
  • The agreement is registered.

What is near relation has neither been defined in the Act, nor in any judicial pronouncement. But, from the various decided cases it appears that it will cover blood relations or those related through marriage, but would not include those relations which are not “near”, but only remotely entitled to inherit. “Natural love and affection” between the parties so nearly related is also needed. “Near relation” does not necessarily imply natural love and affection.

In Rajlucky Dabee Vs. Bhootnath Mookerjee - after lot of disagreements and quarrels between a Hindu husband and his wife they decided to live apart and husband executed a registered document in favour of wife whereby he agreed to pay for her separate residence and maintenance and agreement also mentioned about quarrels and disagreements between the two. Held that from the recitals in the document it was apparent that the document had been executed not because of natural love and affection between the parties but because of the absence of it, and therefore the wife was not entitled to recover the sums mentioned in the document.

Compensation for past voluntary services [S.25(2)]

When something has been done “at the desire of the promisor”, that constitutes a good consideration in respect of a subsequent promise to compensate for what has already been done. The second exception to Section 25 covers “cases where a person without the knowledge of the promisor, or otherwise than at his request does the latter some service, and the promisor undertakes to recompense him for it. The promise to compensate, though without consideration, is binding because of this exception. The exception also covers a situation where the promise is for doing something voluntarily “which the promisor was legally compellable to do.” When A finds B’s purse and gives it to him and then B promises to pay A Rs.50, or A supports B’s infant son and B promises to pay A’s expenses in so doing, there is a valid contract in such cases although A’s act was a voluntary one. The exception covers situations where the service is rendered voluntarily and without the promisor’s knowledge. It is also necessary that the service must have been rendered to the promisor and nobody else.

Promise to pay a time barred debt

Another situation when an agreement is a valid contract even without any consideration is a promise to pay a time-barred debt. Section 25 (3) requires the following essentials to be satisfied in such a case.

  • The promise must be to pay wholly or in part a time barred debt, i.e. a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
  • The promise must be in writing and signed by the person to be charged there with, or his duly authorized agent.

It is necessary that the debt must be one of which the creditor might have enforced payment but for the law for limitation of suits. It, therefore, does not cover such debts which are unenforceable for some other reasons. Thus if an insolvent debtor has been discharged from payment under the insolvency law a subsequent promise by him to pay that debt cannot be enforced unless there is a fresh consideration for the same. Similarly, if the payment of the debt cannot be enforced because the debt was contracted by a person during his minority, the same is not now enforceable if, on attaining majority, a promise is made to pay the same, because a minor’s agreement which is void is incapable of being validated by ratification.

Agency

According to section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.

Gifts

The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of the Indian Contract Act, 1872 states that the rule of an agreement without consideration being void does not apply to gifts made by a donor and accepted by a donee.

Unlawful Consideration and its effect

Consideration means something reciprocally it’s actually a price which might be in sort of some benefits paid by one party for the promise of another party. For legitimate contract considerations and objects should be lawful. Object means the aim. Consideration means the worth of the promise. The consideration or object of an agreement is lawful, unless-

  • it is forbidden by law; or
  • is of such nature that, if permitted, it might defeat the provisions of any law; or
  • is fraudulent; or
  • involves or implies injury to the person or property of another or;
  • the Court regards it as immoral, or against public policy.

Every agreement of which the object or consideration is unlawful is void.

Forbidden by Law

Where the object or the consideration of an agreement is that the performance of an act which is forbidden by law, the agreement is void. Acts or undertakings forbidden by law are those punishable under any statute also as those prohibited (expressly or implicitly) by special legislation of Parliament and state legislatures.

For example, the assembly or sale of excisable articles is prohibited under the Excise Act except upon a Government license. Sale of liquor without a license is prohibited for this reason under the Excise Act and is, therefore, illegal. A contract entered into in contravention of a statutory prohibition is going to be null and void whether such prohibition is express or implied.

Defeat the purpose of Provisions of any Law

Though the thing or consideration for the agreement, sometimes indirectly forbidden by law, they’re still forbidden if nature defeats the aim of the provision of law. Agreement with such an object or consideration is void. Where a legislative enactment provides penalty for an act or promise, the performance of such an act or promise would amount to the defeat of that enactment, because it is implicit that the statute intends to forbid that act.

In Rajat Kumar Rath v. Government of India, the Orissa High Court has explained the distinction in the following words:

A void contract is one which has no legal effect. An illegal contract through resembling the void contract in that it also has no legal effect as between the immediate parties has this further effect that even transactions collateral to it became tainted with illegality and we, therefore, in certain circumstances not enforceable. If an agreement is merely collateral to another or constitutes an aid facilitating the carrying out of the object of the other agreement which though void is not prohibited by law, it may be enforced as a collateral agreement. If on the other hand, it is part of a mechanism meant to carry out the law actually prohibited cannot countenance a claim on the agreement, it being tainted with the illegality of the object sought to be achieved which is hit by the law. Where a person entering into an illegal contract promises expressly or by implication that the contract is blameless, such a promise amounts to collateral agreement upon the other party if in fact innocent of turpitude may sue for damages“.


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