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As commercial cross-border disagreements become more numerous and sophisticated, well-prepared chinese entities are now playing a larger role in international dispute resolution. Sophie Cheng reports

STEPS TAKEN BY CHINESE COMPANIES to venture beyond the national border have often been met with geopolitical pushbacks or region-specific market risks. Yet, these companies have persisted, with each foray into foreign territories increasing knowledge and experience.

Now, Chinese entities are playing a more active and professional part in resolving such international disputes. This reflects both a shift towards stronger rights enforcement among domestic companies and investors, and closer policy-based connections between Chinese and international arbitration institutions.

Complex dispute cases such as cross-border data transfer are testing the expertise of legal practitioners, and also compelling companies and investors to take proactive steps to prepare for and deal with dispute risks. Within this theatre, choices for dispute resolution to do with method, venue or language can spell the difference between winning or losing.

Trending in dispute

A sharp increase in China’s outbound disputes has not escaped the attention of experts such as Wilfred Ho, a partner at White & Case in Hong Kong. He says that one driver is the country’s pivot from a traditional economy to “new productivity forces”. This is particularly so within China’s real estate sector, which is struggling to recover.

“Companies facing financial pressure are increasingly restructuring their operations, leading to disputes over contractual obligations in offshore projects and liquidation of assets abroad,” says Ho.

This trend aligns with China’s increasingly prominent role in international trade and economic affairs. As Chinese companies embrace “going global” as a new economic norm, and a volatile geopolitical landscape adds uncertainty, disputes are easily triggered in cross-border trade and compliance with foreign regulations.

A majority of companies invest in the energy, mining or infrastructure sectors. Cao Lijun, a Beijing-based equity partner at Zhong Lun Law Firm, says such investments are capital-intensive, have long payback periods, and involve sensitive issues such as local resources and environment. These factors make them dispute-prone.

Cheng Jun, a partner at Zhong Lun Law Firm in Beijing, says Chinese companies must be aware of the complexities and challenges of overseas construction projects, especially those companies engaged in the mining and energy sectors.

Rachel Turner

He says outbound investors sometimes make hasty commitments to secure projects. They can be overly optimistic about things like the timeline for financing closure and operational launch. “But, in practice, many projects fail to be completed on schedule,” says Cheng.

Cao notes that conflicts are common in traditional mining, renewable energy, international engineering, international finance and bonds, telecoms, and those sectors involving variable interest entity structures.

In particular, in construction, energy and infrastructure, Rachel Turner, a Shanghai-based partner at Pinsent Masons, observes an uptick in the scale of projects, with many “giga projects” in locations such as Saudi Arabia. These projects pack higher value, but also a greater risk of disputes.

The Saudi legal framework is also undergoing a rapid revamp and upgrade, recently introducing a new law on civil transactions. “This will lead inevitably to a wider discussion on how giga projects are contractually structured and delivered,” says Turner.

Responding to the increase in overseas disputes, she says Chinese entities are keenly engaging in cross-border dispute resolution and continue to be significant users of international arbitration institutions such as the Court of Arbitration of the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIAC), the Singapore International Arbitration Centre (SIAC), the London Court of International Arbitration (LCIA) and the Arbitration Institute of the Stockholm Chamber of Commerce.

“[Their] experience and sophistication has made it easier for Chinese companies to refer lower-value disputes to arbitration,” she says.

Byron Phillips, a partner of litigation, arbitration and employment at Hogan Lovells’ Hong Kong office, has seen a significant increase in arbitration “across the board”, due mostly to “its prevalence as a method of dispute resolution in tech, life sciences and energy contracts, and its suitability for cross-border disputes, including in relation to enforcement.”

Byron Phillips

Enforcement risks

For businesses and investors, it is important to be cognisant of the variation in enforcement of judgments and arbitral awards across jurisdictions. White & Case’s Ho says that, even among signatory nations to the New York Convention, the effectiveness of enforcement can vary according to local laws and practices.

He says that with a rise of protectionism in arbitration, certain jurisdictions may impose restrictions on foreign arbitral institutions or favour local arbitration centres that may not offer the impartiality and expertise expected from established institutions.

Heidi Chui, a Hong Kong-based partner at Stevenson Wong & Co, says enforcement risks, including sanctions, are critical factors to consider before commencing proceedings. Chui says sanctions can complicate enforcement of existing judgments or arbitral awards, particularly cross-border payments or settlements.

“In some cases, sanctions may also prevent arbitration from proceeding, as sanctions-related disputes may not be arbitrable, or certain parties may be unable to act in jurisdictions affected by sanctions,” she says.

Chui cautions companies with interests in jurisdictions plagued by war or conflict to carefully consider their dispute and enforcement strategies, stressing that enforcement of arbitral awards may be difficult if assets are located within the borders of warring nations.

She says recognition and enforcement of arbitral awards rely on courts whose jurisdictions cover the locations of assets. However, a place of conflict may not have properly functioning courts, which will block access to the assets.

Dong Chungang, a partner at Jingtian & Gongcheng in Beijing, underscores the importance of choosing a neutral venue and institution for dispute resolution to avoid the interference of protectionism, and to minimise the impact of potential sanctions.

White & Case’s Ho advises companies to localise disputes in arbitration-friendly jurisdictions such as Singapore, Hong Kong and London. “Arbitration-friendly jurisdictions generally have established legal frameworks and institutions to uphold arbitral awards and ensure procedural fairness,” he says. “Further, these jurisdictions are often neutral seats, reducing fairness concerns that may otherwise arise for parties with competing home seats.”

Wilfred Ho

On the litigation side, Hogan Lovells’ Phillips observes that the US, Canada, EU and UK have seen a surge in collective or class actions relating to ESG (environmental, social and governance) matters, data breaches, antitrust matters and other regulatory action.

“This has yet to really take hold in the Asia-Pacific area, but there is definitely contagion from these other regions being felt in APAC, and we are starting to see signs that these types of disputes will grow here, too, even if certain jurisdictions, for example Hong Kong, do not have class action regimes,” he says.

With societal attitudes in Asia shifting towards greater enforcement of rights, private litigation has been perceived as a more viable option than before. “The perception pre-covid that private parties in Asia are less inclined to bring actions is becoming outdated,” says Ho.

With an increase in M&A activity, Ho has noticed a shift in litigation strategies by biotech companies: plaintiffs are increasingly allowing mergers to proceed before subsequently filing class action lawsuits to seek damages for alleged misrepresentations during the merger process. This tactic aims for greater financial recovery post-deal closure, rather than blocking transactions initially.

Emphasising the importance of pre-litigation preparation, Ho says it is often too late to implement strategic responses by the time a dispute arises. Good preparation includes maintaining thorough documentation, training employees on regulatory requirements, and establishing clear governance structures. Early engagement with legal counsel to develop strategies and contingency plans also facilitates effective actions in the event of a dispute.

“Such proactive measures would not only enhance the company’s ability to defend against claims, but also position it favourably in negotiations, potentially avoiding costly and protracted litigation,” he says.

Ho says it is vital to recognise that “Asia is no longer a sleepy region on the enforcement of rights”. Businesses should be prepared to face increased class actions spreading across matters including employment, data security, ESG and consumer protection.

“In particular, companies should be aware of institutional investors increasingly using class action as a corporate governance tool to influence management decisions,” he says. “There has also been a rise in the use of class action to recover lost investments from cryptocurrency and other complex financial products.”

When commercial arbitration or litigation cannot fully resolve disputes or recover losses, Zhong Lun’s Cao suggests investors may consider safeguarding their legitimate rights and interests through investor-state dispute settlement.

He advises investors to pay close attention to the contents of bilateral investment treaties (BITs). “Given the flaws in the scope of arbitrable disputes in China’s first-generation BITs, domestic investors may consider establishing a special purpose vehicle in a third country if necessary,” says Cao.

Cao Lijun

“This would allow them to invest and obtain protection with a more comprehensive set of rights protection available under the BIT between the third country and the host country.”

Stevenson Wong’s Chui says investment treaty arbitration is another option, although it is typically more appropriate for large projects with significant sunk costs. “Even where an award is obtained, risks remain around enforcement, particularly the non-payment of awarded sums,” she says.

Riding high on the institutional co-operation between mainland China and Hong Kong, Chui highlights the growing tendency of enforcing mainland or foreign judgments in Hong Kong.

With the new Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance, effective 29 January 2024, Hong Kong has enhanced its enforcement regime for mainland judgments.

Chui says the new regime expands the scope of enforceable judgments, allowing for the recognition of both monetary and non-monetary judgments, and removes the requirement for exclusive jurisdiction or a contractual basis. This contrasts with the previous Mainland Judgments (Reciprocal Enforcement) Ordinance, which only allowed enforcing monetary judgments related to commercial contracts.

“The wider range of eligible courts and streamlined enforcement process offers greater certainty and flexibility in cross-border dispute resolution,” she says. “Companies should take note of these legal developments to optimise their enforcement strategies across jurisdictions.”

Amid talks of enforcement, Pinsent Masons’ Turner notes interesting recent statistics about arbitral award enforcements in China, presented in the Supreme People’s Court of China’s 2023 Annual Report on Judicial Review of Commercial Arbitration. “It contradicted the common misconception that it is difficult to enforce an arbitration award in China,” she says.

The report shows Chinese courts received 75 cases requesting the recognition and enforcement of foreign arbitral awards in 2023. Sixty-nine were recognised and enforced. These figures bring China’s aspirations in international arbitration practice to the fore. They are embodied in a strategy to build international arbitration centres, which has been elevated to the status of central policy and implemented in regions such as Beijing and Shanghai.

For example, the China International Economic and Trade Arbitration Commission (CIETAC) has expanded its panel of arbitrators to 145 countries, including 112 countries along the Belt and Road Initiative, in 2023.

“Overseas arbitration institutions, represented by the HKIAC, are about to establish representative offices in Beijing, which may offer a new option to users of cross-border dispute resolution to enjoy international arbitration services right at home,” notes Dong, of Jingtian & Gongcheng.

Data and IP

Around the globe, countries wrestle one another over data security regulation. Evolving systems of cross-border data transmission of evidence add a complex layer to the changing landscape of outbound disputes.

“Apart from the Hague Evidence Convention, this issue will inevitably involve China’s Personal Information Protection Law, Data Security Law, and other provisions related to cross-border data transfer, and it may even involve the Law on Guarding State Secrets,” says Li Ran, a Beijing-based partner at Tian Yuan Law Firm.

She says the “most prominent issue in the cross-border transfer of evidence in litigation or arbitration is the conflict between the discovery rules of the US litigation and the information protection laws of other countries”. Parties often find themselves mired in dilemma.

Li Ran

Ray Liu, a global partner and managing partner at Dorsey’s Beijing office, says China mandates the approval of competent central government authorities before parties can legally submit data to foreign judicial authorities, a process which usually takes time. However, failure to submit pertinent evidence within required timeframes of foreign proceedings may subject the parties to sanctions in those places.

Different positions taken by companies correspond to entirely different strategies for dealing with the issue. Tian Yuan’s Li notes that if a company is the party requesting disclosure, it should make full use of litigation or arbitration rules to explain to the judge or arbitral tribunal the necessity of providing such information, and any obstacles or restrictions that prevent it from being provided.

If, however, a company is the party required to disclose, it should first determine whether the information should be provided, whether failure to provide it will have an adverse effect on the case, and whether it can afford the worst consequences.

If information cannot be disclosed, Li suggests companies consider limiting or narrowing the scope of disclosure as much as possible through procedural objections (e.g. challenging the jurisdiction), and by introducing provisions of the laws of other countries (e.g. mandatory provisions on data regulation in the country where the information is located).

For data that can be disclosed, Li recommends communicating with the jurisdiction’s government as necessary to meet the regulatory compliance requirements of the country in which the information is located for cross-border transfers of information. In the case of personal information, confirm that user consent has been obtained or desensitisation has been carried out.

“For Chinese companies, data regulation and restrictions on outbound data transfer have become stricter than before. In addition, the legality of witnesses testifying remotely from mainland China for overseas legal proceedings is also facing challenges,” says Jingtian & Gongcheng’s Dong.

He advises companies to fully consider these factors when choosing dispute resolution methods and jurisdictions. “Or, in case of necessity, appropriately excluding the obligations of document submission and evidence production in the agreement may help avoid more troubles in the future,” he says.

As China becomes a major intellectual property (IP) power and an IP exporter, the field of IP disputes has also seen a sea change in the context of advancements of disruptive technologies.

Besides traditional litigation, Dorsey’s Liu notes that “IP dispute resolution mechanisms have diversified”. More parties are opting for arbitration or mediation to resolve IP disputes. He points to the World Intellectual Property Organisation’s (WIPO) Arbitration and Mediation Shanghai Service recently rendering its first arbitral award in a foreign-related IP dispute.

The case was arbitrated under the WIPO Expedited Arbitration Rules and took less than two months from application to award. Liu says the Shanghai service has also administered more than 120 mediation cases of cross-border IP disputes. Highlighting regulatory issues that need attention, he says the rapid development of technology can pose challenges to IP legislation and judicial practice.

Taking copyright as an example, he says “issues such as the copyrightability of AI-generated works, the determination of copyright infringement by AI-generated works, and the allocation of infringement liability, despite highly instructive cases in practice, still require more specific legislative guidance on determination standards”.

Ray Liu
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Best practices

Against the complexity of foreign dispute practice, Zhong Lun’s Cao suggests companies and investors should consider the ongoing impact of the language of arbitration on the dispute resolution process when they are negotiating arbitration agreements and during contract signings.

Cao says Chinese and foreign companies often agree to use both Chinese and English as the languages of arbitration, but bilingual arbitration will inevitably prolong the process and increase costs. In addition, bilingual arbitration can present challenges such as whether translation of evidence is needed, and how the trial should be conducted, especially the cross-examination of witnesses.

When participating in international commercial arbitration, Cao says companies should be aware of the characteristics of different procedures and their impact on the case. In international arbitration, there are generally two types of procedures for submitting pleadings and factual witness testimony: the memorials approach and the pleadings approach.

Cao says the memorials approach originates from the civil law tradition. It is more helpful where parties and arbitral tribunals are fully considering each party’s assertions at all stages, and if the matter in dispute is clearer and does not involve many factual issues.

On the other hand, the pleadings approach derives from the common law tradition and may help parties to identify core issues at an earlier stage if an arbitration involves multiple disputes or issues. Cao says the difference between the two procedures can affect the procedural timetable and case progress, and also impact the content of witness statements.

Chris Tung, a partner at the Hong Kong office of K&L Gates, cautions: “It is impossible to anticipate all of the circumstances that could lead to a commercial dispute during negotiations. Parties that openly acknowledge this reality stand a better chance of building more resilient business relationships while negotiating the commercial terms of it.”

Tung says that, by addressing the issue up front, parties can create trust, reinforce good faith, and set reasonable expectations and commercial release valves if circumstances change. For commercial contracts, it can be helpful to negotiate a multi-tiered dispute resolution clause that gives parties the commercial space to pivot in the event of unexpected regulatory changes.

Susan Munro, a registered foreign lawyer at K&L Gates in Hong Kong, says such clauses require careful, case-by-case consideration. They must be tailored to reflect the requirements of relevant legal jurisdictions and the parties’ respective commercial positions.

“It is also important that such clauses are drafted with a focus on ease of enforcement, and to avoid complex clauses that unwittingly create roadblocks to any future dispute resolution process,” says Munro.

Edward Liu, a partner at Haiwen & Partners based in Hong Kong, suggests companies can bolster their conflict resolution capabilities through proactive management, tailored strategies, compliance adherence and expertise investment.

By proactively managing conflicts, companies can identify and address potential disputes early on, preventing them from escalating into costly battles. Tailoring strategies to the specific characteristics of each conflict and the involved parties’ goals enhances the likelihood of reaching mutually beneficial resolutions, while optimising resource allocation and preserving relationships.

“Furthermore, by investing in expertise and cultivating internal capabilities in dispute resolution through training programmes, enterprises equip themselves with the knowledge and skills necessary to navigate complex disputes effectively, enhancing their ability to achieve timely and favourable resolutions,” says Liu.

Given the strong price sensitivity of Chinese parties and their preference for contingency fee arrangements when requesting quotes from lawyers, Huang Ningning, a Shanghai-based partner at Grandall Law Firm, also reminds companies to be aware that contingency fee models may not be compliant in certain jurisdictions when handling overseas cases.

Companies need to remember to allow for differences between legal systems. Additionally, he says the involvement of third-party funding should be considered in some cases.


ARBITRATION IN HK A MORE ATTRACTIVE OPTION

For leading arbitration institutions, one of the most important steps for self-improvement is to continually update their arbitration rules. The Hong Kong International Arbitration Centre (HKIAC) serves as a vivid example of this, announcing an updated set of rules in May 2024.

Among the key updates are new powers and duties for both tribunals and the HKIAC, such as allowing tribunals to veto changes in legal representation to prevent conflicts of interest incorporating diversity, environment and information security considerations, and granting the HKIAC power to review arbitrator fees.

“These innovative provisions are designed to address current challenges in arbitration, including cost efficiency, transparency and the use of technology,” says Heidi Chui, a Hong Kong-based partner at Stevenson Wong & Co.

Additionally, there are extended powers, such as the HKIAC’s ability to suspend or terminate proceedings if cost deposits are unpaid before a tribunal is constituted. By refining existing procedures and codifying key practices, Chui says the new rules ensure arbitration remains responsive to the evolving needs of businesses and investors.

Huang Ningning, a Shanghai-based partner at Grandall Law Firm, says the rule updates are to enhance arbitration efficiency. “This responds to one of the common criticisms towards international arbitration in practice; namely, that arbitration proceedings are becoming increasingly lengthy and costly for the parties involved,” says Huang.

Huang Ningning

Byron Phillips, a partner at Hogan Lovells’ Hong Kong office, views the new rules as “a significant innovation”, which should provide greater efficiency and control over arbitral proceedings, especially to prevent undue delay by intransigent parties.

Rachel Turner, a Shanghai-based partner at Pinsent Masons, says there is also a renewed focus on the role of culture in dispute resolution and how parties’ culture should be considered in terms of behaviour and relevant factual actions, and whether international arbitration institutions have the right lists of arbitral candidates.

Ray Liu, a global partner and the managing partner of Dorsey’s Beijing office, notes further elaboration on information security in the updated rules. The new rules allow parties to agree on reasonable measures to protect shared information and empower the arbitral tribunal to take measures to ensure information security.

Wilfred Ho, a partner at White & Case in Hong Kong, stresses businesses must now “be more vigilant in handling confidential information throughout the arbitration process and implement robust data protection measures, keeping in mind that failure to do so could result in adverse consequences”.

Ho calls for more attention to the updates on efficiency. The HKIAC may now take any necessary measure to preserve efficiency after consulting the parties and the tribunal, whereas tribunals are empowered to adopt procedures to decide cases efficiently. He finds these changes welcome; previously, the New York Convention required both parties to be heard, making it difficult to expedite arbitrations.

Complementing the HKIAC update is a highly anticipated pilot initiative of “allowing Hong Kong-invested enterprises to adopt Hong Kong law and to choose for arbitration to be seated in Hong Kong” in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

“It should be noted that offshore arbitration is permitted as a matter of PRC law, provided that the parties to a cross-border agreement have agreed to it and that one party is located outside mainland China,” says Chris Tung, a partner at the Hong Kong office of K&L Gates.

Chris Tung

Tung says the practical change envisaged in the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) update is that the PRC subsidiaries of two Hong Kong companies can now choose arbitration in Hong Kong (a separate legal jurisdiction, viewed as being an offshore party), which they could not do previously. “It remains to be seen whether this change will encourage Hong Kong companies to invest in the nine cities and arbitrate with a seat in Hong Kong,” he says.

Edward Liu, a Hong Kong-based partner at Haiwen & Partners, says: “This initiative, expanding from the Qianhai Co-operation Zone in Shenzhen to pilot programmes in the nine cities of the GBA, signifies robust national support for harnessing Hong Kong’s unique advantages.

“With this integration comes pressing issues such as harmonising dispute resolution standards across the region, a challenge that the governments of Guangdong, Hong Kong and Macau have been actively addressing through unified regulatory frameworks and initiatives like the establishment of the Greater Bay Area Legal Department Joint Meeting System.”

By August 2023, judges of the Qianhai Co-operation Zone Court had applied various foreign laws in 62 cases, 55 of which involved the application of Hong Kong law, according to Susan Munro, a registered foreign lawyer at K&L Gates based in Hong Kong.

Practically, Ho of White & Case says that integration across the GBA allows for a greater flow between common and civil law jurisdictions. “This facilitates co-operation to bridge gaps between the two systems, allowing businesses to benefit from more comprehensive advice from both common and civil law perspectives to reduce risks of conflicting legal interpretations.”

Businesses can also utilise the greater flexibility to structure contracts aligning with Hong Kong’s dispute resolution mechanisms, while accommodating the civil law requirements of their mainland counterparts.


CHINA’S ARBITRATION LAW MOVES TOWARDS INTERNATIONAL PRACTICE

As China embarks on a process of aligning its arbitration practice with international norms, a first major revision of arbitration law since promulgation in 1995 is poised to bolster the nation’s vision as a favourable destination for international arbitration.

A draft revision of the Arbitration Law was submitted to an ongoing session of the Standing Committee of the National People’s Congress and will be up for its first review at the beginning of November.

Overall, this revision involves a wide range of topics to increase the flexibility and efficiency of arbitration procedures, and merits attention from businesses.

The revision includes expansion of arbitration scope, improvement of arbitrator disclosure requirements, allowing online arbitration, adding seat of arbitration provisions, and introducing a “special arbitration” system, according to Ray Liu, a global partner and the managing partner of Dorsey’s Beijing office.

Heidi Chui, a Hong Kong-based partner at Stevenson Wong & Co, highlights the support of ad hoc arbitration which, particularly for foreign-related maritime and free trade zone disputes, addresses a longstanding challenge for international parties who favour flexible arbitration structures.

“This move will likely appeal to the maritime and international trade sectors, as ad hoc arbitration offers flexibility in selecting arbitrators, procedural rules and costs,” says Chui.

Edward Liu, a Hong Kong-based partner at Haiwen & Partners, expects the change to “facilitate the resolution of a wider range of disputes with foreign elements, ultimately promoting a more open and inclusive arbitration environment”.

With a robust infrastructure comprising numerous arbitration committees and a substantial pool of arbitrators, Liu says China is well positioned to play a significant role in facilitating economic development and international co-operation through ad hoc arbitration.

Chui also underscores the introduction or confirmation of the “seat of arbitration” concept and “competence-competence” principle. The former aligns China with international arbitration practices, providing clarity on procedural and supervisory jurisdiction, particularly in international cases. The latter grants tribunals power to rule on their own jurisdiction, giving them more autonomy.

“Although Chinese courts may still have the power to rule on the validity of arbitration agreements, it is noteworthy that if a lower court wishes to invalidate a foreign-related arbitration agreement, it shall report this decision to the higher courts progressively, with only the Supreme People’s Court of China having the power to confirm invalidation,” says Chui. “This approach reflects China’s pro-arbitration stance, especially in resolving foreign-related disputes.”

Heidi Chui

The revision supports a streamlined, user-friendly process that includes online dispute resolution, shorter timeframes for applying to set aside awards, and increased support for international arbitration institutions within the free-trade zones (FTZs). Chui says these updates align China with current global trends and will appeal to companies that require swift resolution of trade disputes.

She reminds businesses to be aware of new time limits and to track the establishment of international arbitration institution branches in FTZs if they prefer to engage with them.

Haiwen’s Edward Liu says the revision seeks to enhance the credibility and competitiveness of the Chinese arbitration framework on a global scale.

“By refining the legal framework to incorporate Chinese characteristics while ensuring compatibility with international rules, China aims to create a business environment that is not only market-oriented and law-based, but also internationally recognised,” he says.

Edward Liu

Given the favourable arbitration terms and flexibility in FTZs, Chui advises that businesses may consider incorporating within a specific FTZ. They are also advised to reassess arbitration clauses in contracts to leverage the new law, for example, by clarifying the seat of arbitration, and consider using online platforms or ad hoc arbitration structures within FTZs. These options can offer efficiency and cost benefits.

“Given that the proposed revisions are still under consultation, it is important to monitor regulatory updates, following any guidelines from arbitral institutions and China’s authorities on the interpretation of the new law,” she says.

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