Construction Arbitration and Turnkey Projects

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A ‘turnkey’ project is so called because (in theory at least) the employer, after taking over the project, has only to ‘turn the key’ to activate the plant or other project that has been constructed. It is a frequently used model of procurement for power stations, processing plants and where work is funded by way of project financing, as it is generally considered to be a more ‘bankable’ procurement model. The contractor takes the vast majority of responsibility in terms of design, engineering, procurement and construction. The owner specifies the output or performance that it requires of the facility or plant but rarely provides detailed specifications. It is for the contractor to determine how it intends to achieve the required output or performance. The contract price is almost always a lump sum and there is a fixed completion date that can only be adjusted in a limited number of circumstances (e.g., acts of prevention by the owner).

The performance of the plant will be assessed against a range of detailed criteria specified in the contract documentation (normally in a lengthy schedule). In practice, completion will only be achieved after extensive rounds of taking over and performance tests. As well as claims concerning delay and cost overruns, which are a common feature of construction disputes in general, arbitrations concerning turnkey projects frequently involve issues concerning fitness for purpose, non-compliance with owner requirements, disputed variations to the specification and the justification for and consequences of termination of the contract.

Although contractors are likely to set a higher price for taking on the increased risk as compared with more traditional forms of procurement, extreme competition in some international markets (most notably, but not exclusively, the Middle East) has led contractors to bid lower prices, which can in turn lead to more claims resulting in disputes. The size and complexity of turnkey projects often means these disputes (and the arbitrations required to resolve them) are also large and complex.

Standard forms

Although some turnkey projects are procured on bespoke forms of contract, frequently parties will use a modified version of a standard form. A form commonly encountered is the International Federation of Consulting Engineers (FIDIC) Silver Book (of which the second edition, released in 2017, was re-released with amendments in November 2022 as part of the 2022 Reprints).[2] Consistent with the philosophy of turnkey procurement, the terms of this standard form place a heavy burden on the contractor in terms of design responsibility and risk. Fitness for purpose is a contractual requirement. The intended effect is to achieve, so far as is possible, certainty of final price and completion date. However, there are exceptions to the extent of risks that the contractor takes on and these often form the basis of disputes that can lead to arbitration. These are discussed below.

Other forms of turnkey contracts include the Japanese Engineering Advancement Association Contract, the International Chamber of Commerce Model Turnkey Contract, the US American Institute of Architects Contract, the UK Institution of Chemical Engineers International Contract Suite (although this needs some adaptation to make it properly ‘turnkey’) and the Belgian Orgalime Turnkey Contract. Although the terms of these contracts vary in some respects, the FIDIC Silver Book is discussed below on the basis that it is a typical example of a turnkey contract standard form that is commonly used as a basis for contracting on international turnkey projects.

The contractor’s key obligations, as set out in the 2017 FIDIC Silver Book, are as follows:

  • when completed, the work is to be fit for the intended purposes defined in the employer’s requirements;
  • the work is to include anything that is necessary to satisfy the employer’s requirements and schedules, or is implied by the contract, and all work that (although not mentioned in the contract) is necessary for stability or for the completion, or safe and proper operation, of the work;
  • the contractor is deemed to have scrutinised the employer’s requirements and is responsible for the design of the work and for the accuracy of the employer’s requirements;
  • the employer is not responsible for any error, inaccuracy or omission of any kind in the original employer’s requirements and any data or information received by the contractor, from the employer or otherwise, does not relieve the contractor from its responsibility for the design and execution of the work; and
  • there are limited exceptions to the foregoing where the employer is responsible for the correctness of certain portions of the employer’s requirements and data and information provided by it. These are portions, data and information stated in the contract as being immutable or the responsibility of the employer; definitions of intended purposes of the work or any parts thereof; criteria for the testing and performance of the completed work; and portions, data and information that cannot be verified by the contractor, except as otherwise stated in the contract.

The parties may agree to mitigate the above terms by, for example, providing for the contractor only to assume risk following a specified period for inspection or adopting existing ground condition reports as a benchmark to apportion risks between the employer and contractor. The precise scope and application of these exceptions can be areas of dispute between the parties.

Additional cost and extensions of time

The foregoing does not mean that the final contract sum will not vary from that specified at the time the contract was executed. The contract sum will usually be a fixed price. However, an employer will usually have the right to issue variation instructions, although it must recognise that substantial extra costs may be incurred, both as to the cost of the variation work itself and disruption to the contractor’s regular progress. The undesirable phenomenon known as ‘scope creep’ may also arise where the scope of a project is not properly defined at the outset and unplanned variations become necessary, notwithstanding the initial definition of what is required in the employer’s requirements. Such a process will inevitably lead to substantial increased cost, which in turn can lead to disputes about whether these costs should be borne by the contractor or the employer.

Often these disputes can be characterised as the difference between design development (which is usually at the contractor’s risk) and variations (for which the employer is usually responsible).

Another form of increased cost that may not be fully budgeted for will be the interface with other work being carried out by or on behalf of the employer on other sites (or even the same site). The turnkey contract may be part of a wider project for which work is being carried out under other contracts at several different sites adjoining each other. Site and workspace boundaries may not be well defined and there may be work being carried out for the employer that is unconnected (or not directly connected) with that within the turnkey contract, but that affects the contractor’s regular progress, again causing more expense.

Yet another basis for claiming additional cost may be the employer’s failure to comply with the requirements in the contract for it to give possession of the site or to supply feedstock or other materials or components. If these are not provided at the times specified in the contract, then the contractor may have further scope to claim for increased cost.

In all the above cases, a contractor may also claim for extra time so as to extend the completion date and reduce its liability for liquidated damages for delay. As with other forms of construction contract, determining responsibility for delay in the context of turnkey projects can be factually and technically complex, giving rise to significant disputes. This is particularly the case where there are arguably two or more competing causes of delay, some of which are at the contractor’s risk, and some of which are at the employer’s risk (i.e., concurrent delay). However, parties often expressly set out how to deal with concurrent delay; for example, by providing that the contractor is not entitled to an extension of time in such circumstances, or is entitled to an extension of time but not cost. In this regard, the 2017 FIDIC Silver Book states that the special provisions may set out rules and procedures for dealing with concurrent delay, if the parties so agree. That said, true concurrent delay is relatively rare in practice.

Testing and completion

Turnkey contracts typically impose a complex regime for takeover and performance testing. Before the plant can be taken over by the employer, tests will have to be carried out to demonstrate compliance with the contract documentation and this may itself be a lengthy process. Following takeover, performance tests may also be required to observe the performance of the plant in action. The contractor’s compliance with the output specification will be assessed and any failure will give rise to retesting.

If it emerges that the plant cannot be operated at the levels required in the contract, then the contractor may have to pay liquidated damages in respect of such a failure (representing the losses suffered by the employer as a result) and it will be for the employer to take on other contractors to bring the plant up to specification if he or she chooses to do so. Given the severe consequences of failing these tests, the reasons for failure can often be contentious issues ultimately resulting in arbitration. For example, with processing plants and power stations, there can be disagreements regarding the extent to which the plant’s performance was affected by the feedstock or fuel that the employer provided. Normally a turnkey contract will specify that it must be of a particular quality or composition and provided in sufficient quantities.

The contractor will usually be liable for liquidated damages should it be in delay as regards the completion date, unless it can demonstrate that it has an excuse for late completion that is allowable within the contract.


It is rarely the case that turnkey contractors will accept unlimited liability for any breaches of contract they commit. Liability may be limited in nature, for example, so as to exclude some or all of the consequential economic loss resulting from a defect, as opposed to its cost of repair. Other limitations may relate to the total amount of damages that may be payable as a result of breach. These may be limited to a percentage of the contract sum or capped as a specific figure (or both). The 2017 FIDIC Silver Book provides for a range of limitations as to both consequential loss and total liability (see Sub-Clause 1.14). Sometimes these contractual liability limits are in addition to any sums payable by way of liquidated damages for delay or lack of performance, and turnkey contracts often include separate caps on the contractor’s liability for delay or performance-related liquidated damages. The scope of these limitations and their effect (including, in some jurisdictions, their enforceability) are also common areas for dispute in turnkey projects.


An employer’s margins (and the contractor’s) may be relatively slim. In some cases, the employer may be using project, as opposed to corporate, finance and therefore relying largely on borrowed money, which adds a layer of financing costs to what may already be an expensive contract package. Even if the employer does not obtain finance on this basis, a contractor will usually charge heavily for the risks it is assuming on a turnkey basis, in particular because it will be adopting the employer’s design as its own in addition to the design the contractor supplied, and must develop those designs to satisfy the employer’s requirements.

It may also add a premium for having to tender within a limited time scale, especially where this has allowed it little time to carry out a comprehensive site assessment and it will be largely accepting responsibility for site conditions, even if these are unforeseeable in the circumstances.

All the above factors have a significant effect on the subject matter and process of a typical construction arbitration concerning a turnkey contract. Both parties may be reluctant to give ground to protect slim margins. And the more economically distressed a project becomes, the greater the likelihood of disputes arising.

Typical claims

In most arbitrations, the contractor will be the claimant seeking an extension of time or loss and expense. In the 2017 FIDIC Silver Book, the scope for claiming an extension of time is relatively limited. As is the case in virtually all construction contracts, the contractor can claim an extension of time (EOT) or an adjustment to the contract price (or both) as a result of variations to the scope of work (see Sub-Clauses 8.5 and 13.3). In addition, the 2017 FIDIC Silver Book provides further grounds on which a contractor can make a claim, as detailed in the table, below.

Grounds for making claims and potential relief

Grounds for extension of timeClause referenceRelief potentially available
Employer’s failure to obtain permitsSub-Clause 1.12EOT and/or cost plus profit[3]
Employer’s delay in giving possession of siteSub-Clause 2.1EOT and/or cost plus profit
Unforeseeable instruction to cooperateSub-Clause 4.6EOT and/or cost plus profit
Changes to access routeSub-Clause 4.15EOT and/or cost[4]
Archaeological and geological findingsSub-Clause 4.23EOT and/or cost
Delayed testing due to employer’s instructionsSub-Clause 7.4EOT and/or cost plus profit
Remedial work not due to contractor’s faultSub-Clause 7.6EOT and/or cost plus profit
Any act of prevention by employerSub-Clause 8.5EOT
Delays caused by authoritiesSub-Clause 8.6EOT
Employer’s suspensionSub-Clauses 8.10 and 8.12(a)EOT, cost plus profit and/or payment for suspended plant and/or materials
Interference with tests on completionSub-Clause 10.3EOT and/or cost plus profit
Employer’s delay in permitting access after taking overSub-Clause 11.7Cost plus profit
Searching for cause of a defect (where contractor does not remedy defect at its cost)Sub-Clause 11.8Cost plus profit
Delayed/prevented tests after completion due to the employerSub-Clause 12.2Cost plus profit
Employer’s delay in permitting access to investigate failed tests after completionSub-Clause 12.4Cost plus profit
Changes in legislation after base dateSub-Clause 13.6EOT, cost and/or adjustment to contract price
Contractor’s suspensionSub-Clause 16.1EOT and/or cost plus profit
Delay during employer’s cure period following contractor’s notice of intention to terminateSub-Clause 16.2EOT and/or cost plus profit
Post-termination protective work instructed by employerSub-Clause 16.3Cost plus profit
Liability for care of worksSub-Clause 17.2EOT and/or cost plus profit
Exceptional eventsSub-Clause 18.4EOT and/or (in limited circumstances) cost

Under the 2017 FIDIC Silver Book (as is frequently the case in turnkey projects), there is no relief or recovery for the contractor if it is delayed or incurs additional cost as a result of unfavourable site conditions, whether or not these were unforeseeable, or in respect of inaccuracies in data provided to it by the employer. Any deficiency in the employer’s requirements is at the contractor’s risk with only limited exceptions.

Claims may also arise as a result of inconsistencies between contract documents. Differing standards (e.g., as to level of output required) may appear in documents produced by one or other of the parties, leading to disputes as to the correct standard and which party bears the risk of any extra work necessary for compliance. Although there is a priority of documents clause in the 2017 FIDIC Silver Book (Sub-Clause 1.5), this may not assist when the relevant documents are at an equal level of priority so that an arbitrator must interpret the contract documents as a whole to identify the parties’ intentions. An example of the difficulties this can cause is to be found in the MT Højgaard case,[5] in which the Supreme Court of the United Kingdom held that a provision warranting that part of the work would have a particular design life prevailed over less onerous terms requiring compliance with standards and the exercise of reasonable skill and care, even though the former was contained in a technical specification.

In response to the contractor’s claims, the employer may seek liquidated damages for delay or failure to meet performance tests. The employer may also seek general damages in respect of defects in the work where these are not covered by the performance testing regime (or where liquidated damages are found to be unenforceable). Issues may arise as to the contractor’s responsibility for defects where they arise from failures of proprietary items, as the contract may contain limited exclusions for failures in this regard.

Both parties may contend that the justification for serving a notice of termination has arisen. In the case of the contractor, common grounds are the employer’s failure to make payment on the due date, the continuation of an exceptional event or failure to submit reasonable evidence that proper financial arrangements have been made for the contract price. The latter argument succeeded in the Trinidad case,[6] even though the employer was a public authority.

The employer may contend that it is entitled to terminate by reason of the contractor being materially in breach, in particular, in failing to proceed with the works with due expedition and without delay. It may also contend that a performance security has not been provided or that an exceptional event has arisen.

The employer will typically claim for the additional costs and any loss or damage suffered in completing the work, whereas the contractor will usually seek to claim loss of profit on uncompleted work. This claim is preserved at Sub-Clause 16.4 in the 2017 FIDIC Silver Book, notwithstanding the general exclusion of loss of profit claims.


In most turnkey contracts, the contractor must give proper notice of any claim for extension of time or additional payment, describing the event or circumstance giving rise to the claim. In the 2017 FIDIC Silver Book, notification must be given as soon as practicable and not later than 28 days after it became aware, or should have become aware, of the event or circumstance. If it fails to give notice, it will not be entitled to additional time or payment. Although giving notice of claim is widely acknowledged to be a condition precedent to the contractor’s entitlement, contractors often fail to give (or to give adequate) notice, which prejudices their ability to recover what would otherwise have been a legitimate claim.

Under the 2017 FIDIC Silver Book, the contractor must, within 84 days of becoming aware of a claim, submit a fully detailed claim, which the employer proceeds to determine. Therefore, unlike FIDIC’s other books, there is no independent determination by an engineer at this stage, thus increasing the likelihood of claims being taken to arbitration. These time limits also apply to employers’ claims for a reduction in the contract price or extension of the defects notification period; and a late notice of claim may be treated as valid if so decided by the employer’s representative.

Common issues

The battleground on which the contractor must base its claim, therefore, may be as to whether it can take advantage of the very limited grounds available to it to seek recompense. Although the contract contains no exclusive remedies clause, so that the contractor is entitled to resort to claims at common law where the contract does not preclude such claims, it may have to produce pleadings of some ingenuity to succeed on a claim for, say, misrepresentation as to site conditions. However, extra-contractual claims are not uncommon in turnkey projects. Notably, if a party seeks to terminate the contract, it may rely on its common law right to terminate for repudiatory breach in conjunction with pleading any contractual grounds to terminate.

As a result of the limited scope for claims, it will often be the case that the contractor will need to analyse events surrounding the tender process and subsequent progress of the contract in minute detail to put together its pleadings. It follows that any resultant arbitration will be document-heavy and inevitably involve extensive expert evidence on delay and quantum issues as well as technical matters such as engineering and design.

Choice of arbitrator

As with most forms of arbitration, the choice of arbitrator is a key decision. Given the size and complexity of disputes involving turnkey contracts, it is often advisable to choose a tribunal with extensive experience of these types of projects.

An arbitrator faced with a contention from a contractor that it had been unfairly disadvantaged by a short tender period combined with the onerous terms of the turnkey contract may be tempted to consider favourably any argument (even extra-contractual) to mitigate the harshness of the situation, such as misrepresentation or quantum meruit. This is where knowledge of the international construction industry, its procurement processes and the execution of projects becomes invaluable to an arbitrator.


It is likely that the parties will have agreed on some means of interim dispute resolution prior to a full-blown arbitration. Under the 2017 FIDIC Silver Book, the default position provides for a dispute avoidance/adjudication board (DAAB) appointed at the outset of the project. In other forms of contracts, it may be that the parties have agreed a tiered dispute resolution mechanism involving negotiations or a mediation prior to commencing arbitration.

Construction contracts often prevent parties from referring a dispute to arbitration unless they have first submitted to interim dispute resolution methods, such as dispute boards. Decisions rendered by a dispute board tend to be of interim binding effect and parties cannot typically refer the dispute to arbitration if they fail to issue a notice of dissatisfaction in respect of a dispute board’s decision in accordance with the contract.

An arbitrator may be invited to make an award enforcing the decision of a dispute board. If a contract is under an older FIDIC form (e.g., FIDIC 1999), the receiving party would be well advised to consider the Singapore decision known as Persero.[7] There, the Singapore Court of Appeal decided that a dispute adjudication board (DAB) decision could only be enforced on the wording of the FIDIC form if an application to enforce by way of interim award was made within an arbitration where all issues before the DAB were raised (generally referred to as the one-dispute approach). To remedy this situation, FIDIC incorporated an amendment to its 2017 suite, but there may be some contracts in which the wording of the 1999 forms has been used. Care must be taken, therefore, when attempting to enforce a DAB’s decision by way of an arbitrator’s award.

Choice of law

Arbitration will generally be the final method of dispute resolution chosen in turnkey contracts as many, if not most, of them involve parties from more than one country. Parties frequently contract on the basis that the procedural law of the arbitration and its seat (location) will be that of a neutral jurisdiction, thus avoiding possible adverse consequences of proceeding in the courts of one or other party. In turnkey contracts of an international nature, the choice of substantive law and the seat of the arbitration can often be different.

Procedural issues

In most cases, the contractor is the claimant as matters referred to arbitration will generally involve its entitlement to an extension of time and (usually) loss and expense. Given that most of the risk and responsibility for work lies with the contractor, the bulk of site records and other information in relation to the progress of the project will be held by the contractor, in particular those documents concerning design and engineering matters, suppliers and subcontractors.

This may put the employer at a disadvantage in the early stages of any arbitration as it may have had only a small team on site, without the capacity to keep abreast of every development as to the contractor’s progress. The contractor, by contrast, will often be ready to hit the ground running and its initial statement of case will have been the subject of extensive preparation. The employer’s time to respond before arbitration commences may have been limited and any documents it has been provided with during the project may not be comprehensive.

There is a distinct issue with regard to turnkey contracts that the employer’s disclosure will probably be limited compared with that produced by the contractor, given the employer’s input into the project as well as limited super­vision on site. For this reason, sequential disclosure is not uncommon, as well as orders for disclosure in phases to suit the progress of the arbitration. Disputes about the extent of the contractor’s disclosure are also not uncommon.

The International Bar Association Rules on the Taking of Evidence in International Arbitration (IBA Rules)[8] may be adopted or even expressly referred to in the arbitration clause. These Rules provide a framework and guidelines for the approach to documenting disclosure for the arbitrator to consider. Given the potential complexity of disclosure issues in turnkey projects, using the IBA Rules is recommended.

Although the IBA Rules contemplate that either party may submit a request to produce, the employer may continue to be at a disadvantage in this respect until relatively late in the arbitration by reason of its relative lack of familiarity with the contractor’s activities, and particularly those of subcontractors. This problem may be especially acute where a contractor seeks permission to amend its statement of case to take account of developing subcontractors’ claims against it, which it is then passing on to the employer.

The employer will need to engage outside experts and, unless it has had a watching brief throughout the project (which is unusual), it will have a substantial learning curve when preparing its response and any counterclaim. By contrast, the contractor is likely to have begun assembling an expert team once it became apparent to it that claims were likely to result in arbitration.

Preliminary points

It is common for preliminary points to be taken in an arbitration to resolve matters that, in some cases, can be determinative of the issue as a whole (and, as a result, can also lead to more meaningful settlement discussions). A common example is whether the contractor complied with the claim notification time limits, such as those found in Sub-Clause 20.1 of the 2017 FIDIC Silver Book).

Other common issues subject to preliminary determination concern matters of contractual interpretation, the existence and effect of any collateral agreements, and the extent of any limitations of liability.


As well as preliminary issues, the complexity of turnkey project disputes often results in tribunals having to bifurcate issues to make submissions and hearings more manageable. Usually this bifurcation is between liability and quantum, but sometimes the project is so complex that tribunals decide to divide between different issues of liability; for example, the causes of delay to distinct sections of the project.

Other issues

In many cases, contractors will largely be passing through subcontractors’ claims, not necessarily adapting them to suit the terms of the main contract as opposed to the various subcontracts. Ideally, these contracts should be back to back, but it is not uncommon for there to be a mismatch between the main contract and subcontracts. Although some of the standard form producing bodies (such as FIDIC) produce subcontracts intended to integrate with their main contracts, they are not always adopted and bespoke forms may be encountered. Some subcontracts may even have been procured on the basis of simple purchase orders with little regard to the terms of the main contract. If the main contractor does not disentangle differing provisions of the subcontract from the claims it puts forward to the employer, the arbitration is likely to be prolonged, with the need for additional rounds of pleadings and requests for further information.

Employers will generally resist any proposal by the contractor to join subcontractors into the main contract arbitration, primarily because the contractor assumes single point responsibility under the turnkey contract, which means there is little incentive for the employer to pursue subcontractors in addition to the contractor. Employers will generally refuse on grounds of increased cost and delay. It is unusual for turnkey contracts to contain provisions for multiparty arbitration although the possibility is referred to by FIDIC in its discussion of particular conditions annexed to the Silver Book. Multiparty arbitration will only be available if all parties concerned agree, whether before or after the dispute has arisen. In complex turnkey projects with numerous contractors and suppliers with an integrated scope of work, it is sometimes the case that all participants are required to sign a dispute resolution deed that acts as consent for them to be joined in multiparty arbitrations. Provisions in the applicable arbitral rules, such as Articles 7 to 10 of the Rules of Arbitration of the International Chamber of Commerce, may also be useful in certain circumstances.


Turnkey projects differ from other construction projects in terms of the high level of risk assumed by the contractor. In particular, the risks associated with design, engineering and fitness for purpose can cause major disputes to arise. In addition, the limited grounds on which a contractor is able to seek relief and recompense can result in the deployment of complex legal arguments surrounding the interpretation of the contract documents, in particular, the specification and scope of work to be performed. Any inconsistencies between the contract documents, or gaps in the specification that have had to be reconciled or filled by performing more work, may give rise to a claim for additional time and money by the contractor.

Overall, this allocation of risks can give rise to a range of large and complex disputes that can, in turn, affect the way in which an arbitration has to be conducted in order to resolve them; for example, they often require significant amounts of factual and technical expert evidence. This evidence needs to be marshalled and presented in an efficient way. The conduct of these arbitrations often benefits from having a tribunal experienced in these types of disputes.


[1] James Doe and David Nitek are partners and Noe Minamikata is a professional support lawyer at Herbert Smith Freehills LLP.

[2] See ‘Conditions of Contract for EPC/Turnkey Projects’ (second edition 2017, reprinted 2022 with amendments). The International Federation of Consulting Engineers (FIDIC) ‘2022 Reprints’ comprise the Red Book, Yellow Book and Silver Book and are accompanied by a new FIDIC 2017 Contracts Guide.

[3] ‘Cost plus profit’ is described as ‘Cost plus the applicable percentage for profit stated in the Contract Data (if not stated, five percent (5%))’.

[4] ‘Cost’ is described as ‘all expenditure reasonably incurred (or to be incurred) by the Contractor in performing the Contract, whether on or off the Site, including taxes, overheads and similar charges, but does not include profit’.

[5] MT Hojgaard A/S v. E.ON Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59.

[6] NH International (Caribbean) Limited v. National Insurance Property Development Company Limited (Trinidad and Tobago) and NH International (Caribbean) Limited v. National Insurance Property Development Company Limited (No. 2) (Trinidad and Tobago) [2015] UKPC 37.

[7] See the Singapore Court of Appeal’s decision in CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33. It should be noted, however, that in subsequent related proceedings, the Singapore Court of Appeal also found that a party need not refer both the merits of a dispute adjudication board (DAB) decision and the paying party’s failure to comply with that decision in a single arbitration, and that the ‘paying party’s failure to comply with a binding but not final DAB decision is itself capable of being directly referred to a separate arbitration under cl 20.6’ (PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation [2015] SGCA 30 [83]).

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