Introduction
Dispute resolution in corporate and commercial contexts in India has evolved significantly from adversarial litigation toward more collaborative methods. Over recent decades, legislators and courts have recognized that mediation – a structured negotiation process facilitated by a neutral – can help parties preserve business relationships, save time and costs, and reduce court congestion. In India’s legal framework, mediation has gradually been woven into civil and commercial procedure.
Key legal milestones include the insertion of Section 89 into the Civil Procedure Code, which empowers courts to refer suitable cases to alternative dispute resolution (ADR) methods; the enactment of the Commercial Courts Act, 2015 introducing mandatory pre-litigation mediation for commercial suits; and the landmark passage of the Mediation Act, 2023 codifying mediation practice and enforcement.
Statutory Framework for Mediation in Commercial Disputes
CPC Section 89: Court-Ordered ADR
Section 89 of the Code of Civil Procedure, 1908, empowers civil courts to initiate ADR when “elements of a settlement” appear to exist between parties.
It provides that if the court perceives the possibility of a settlement, it “shall formulate the terms of settlement and give them to the parties” and then refer the case for one of four processes: (a) arbitration, (b) conciliation, (c) judicial settlement (including Lok Adalat), or (d) mediation. Notably, the court must “effect a compromise between the parties” in the case of mediation, following court-prescribed procedures.
This provision is triggered by Order I Rule 1A of the CPC: if the plaintiff’s pleadings or other information suggest possible settlement terms, the court is statutorily obliged to consider referring the matter under §89. Supreme Court case law has refined Section 89’s scope.
In Afcons Infrastructure Ltd. v. Cherian Varkey Construction, Civil Appeal No.6000 OF 2010, the Court interpreted “mediation” and “judicial settlement” narrowly – effectively limiting court-ordered mediation to court-facilitated sessions, not private negotiation. Afcons also instructed judges to actively discuss settlement prospects with parties rather than mechanically referring every case.
As a result, Section 89 is now applied selectively: judges are encouraged to identify genuinely settlement-suitable cases (for instance, those involving contract or partnership disputes) and to frame possible terms of compromise. However, Section 89 remains permissive in language (“may be referred”) and its use depends heavily on judicial discretion.
While Afcons case promote ADR, empirical reports note that many courts are still reluctant to invoke Section 89, and litigants often lack awareness of mediation’s benefits. In practice, therefore, Section 89 is available as statutory authority for court-annexed mediation, but its actual referral rates have been modest.
Commercial Courts Act 2015: Section 12A Pre-Litigation Mediation
The Commercial Courts Act, 2015 (as amended) makes mediation mandatory at the pre-litigation stage for certain commercial disputes. The Act defines a “commercial dispute” broadly (in Section 2(1)(c)) and, under Chapter IIIA (added by Mediation Act 2023), provides in Section 12A that no suit (where no urgent relief is sought) shall be instituted unless the plaintiff first exhausts pre-institution mediation “in such manner and procedure as may be prescribed”.
Thus, unlike the voluntary framework of CPC Section 89, Section 12A originally imposed a statutory obligation to attempt mediation before starting a commercial suit. This was intended to filter out matters that could be settled outside court and to conserve judicial resources.
This procedure is mandatory: the Supreme Court in Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd., 2022 SCC OnLine SC 1028 held that non-compliance with Section 12A required rejection of the plaint under Order VII, Rule 11 CPC. In other words, a commercial suit filed without the mediation pre-step is not maintainable.
If the defendant files an ordinary suit or counterclaim, many courts now hold that Section 12A applies to them as well, making mediation a sine qua non. Section 12A also contemplates the use of authorities (e.g. panel of mediators or legal services authorities) for conducting mediation, and sets a time limit (formerly 90 days, now 120 days) for completion once initiated.
Originally, Section 12A(5) stated that any settlement under pre-institution mediation “shall have the same status and effect as an arbitral award on agreed terms” under the Arbitration Act, and hence would be enforceable as if it were a civil decree. This meant a mediated settlement under Section 12A was treated, effectively, like a final arbitration award.
With the passage of the Mediation Act, 2023, Section 12A has been revised: the previous language on arbitral award has been replaced. Now Section 12A(5) simply provides that any mediated settlement agreement “shall be dealt with in accordance with the provisions of sections 27 and 28 of the Mediation Act, 2023”.
In practice, this means a mediated agreement under Section 12A is final and enforceable under the general enforcement scheme of the Mediation Act. The substantive import remains similar – a mediated settlement will carry decree-like effect – but is now managed through the Mediation Act’s machinery. Overall, Section 12A represents a unique Indian statutory requirement: mandatory pre-litigation mediation for commercial suits, giving mediation unprecedented leverage in contract disputes.
Arbitration and Conciliation Act: Conciliation and Settlement
The Arbitration and Conciliation Act, 1996 (A&C Act) governs arbitration in commercial contracts and also provides for conciliation (a form of voluntary mediator-assisted settlement). Though primarily an arbitration statute, the A&C Act recognizes amicable settlement. In particular, Section 30(2) directs that any settlement arrived at by the parties during arbitration proceedings shall be recorded by the arbitral tribunal in an arbitral award on agreed terms, signed by the parties.
By statute, an “award on agreed terms” (Section 30(4)) has the same status and effect as any other arbitral award. Section 31 and 32 require that such awards specify their date and place, and upon issuance become final and binding. Furthermore, under Section 36 of the A&C Act, an arbitral award (whether conventional or on agreed terms) becomes enforceable as a decree after the period for challenging it expires without a successful challenge. Thus, settlement through arbitration yields an immediately binding and executory outcome under the arbitration regime.
The A&C Act also contains a dedicated Conciliation chapter (Sections 61–75), which closely resembles mediation. Parties can initiate conciliation voluntarily or upon court reference (similarly to CPC Section 89’s referral to conciliation). Conciliation is facilitator-driven like mediation, and any settlement achieved must be reduced to writing and signed by the parties.
Such conciliation agreements, however, must then be made into a consent decree by a court or arbitral tribunal to be enforceable – they are not self-executing without judicial approval. The new Mediation Act draws on this framework but expands it. Notably, Section 42A of the A&C Act (inserted in 2019) now provides confidentiality protections for arbitrations. The Mediation Act builds a similar confidentiality scheme specifically for mediated negotiations (see below).
In the context of commercial contracts, arbitration remains a dominant dispute resolution choice, since contractual clauses for binding arbitration are enforceable under Section 7 of the A&C Act. However, parties often now include both arbitration and mediation provisions (e.g. “mediation first, then arbitration” clauses discussed below).
The two regimes thus operate in tandem: arbitration provides a formal adjudicative fallback, whereas mediation offers a cooperative pre-litigation path. Indian law treats arbitration clauses as sacrosanct (courts refer parties to arbitration under Section 8 whenever a valid agreement exists), but prior to the Mediation Act there was no comparable statutory compulsion for private mediation clauses (except where Section 12A applies).
Mediation Act 2023: Formalizing the Process
The Mediation Act, 2023 (enforced from October 9, 2023) is the first comprehensive Indian statute devoted solely to mediation. Its main objectives are to encourage voluntary mediation of disputes, standardize procedures, and make mediated settlements easily enforceable. Key features include:
- Definitions and Scope: The Act defines a “mediation agreement” as one arising from a clause in a contract or a separate agreement, and provides that any civil or commercial dispute can be referred to mediation. It explicitly lists types of disputes not suitable for mediation (e.g. criminal offences, certain tax/competition matters, matters affecting third-party rights) to avoid mediating unfit issues.
International mediation is partly addressed: a mediated settlement is enforceable here only if the mediation was conducted in India or involved one Indian party (India has not yet ratified the Singapore Convention on Mediation).
- Process Provisions: The Act allows parties to mediate before or even after a dispute has arisen. Section 5(1) encourages parties to voluntarily submit any civil or commercial dispute to mediation, regardless of a prior clause – albeit saving mandatory cases under Section 12A. Courts and tribunals are empowered to refer parties to mediation at any stage, even if the parties did not have a prior mediation agreement (subject to limited exceptions).
The Act formalizes institutional mediation through “Mediation Service Providers” (MSPs): organizations (including legal services authorities, court-annexed centers, or private ADR bodies) that are registered with a Mediation Council of India (to be established). MSPs must maintain panels of accredited mediators, provide facilities, and register mediated settlements. The Mediation Council will set qualification standards for mediators and develop mediation infrastructure.
- Confidentiality and Privilege: Section 23 makes all communications in mediation inadmissible in court or tribunal proceedings. No party or mediator can be compelled to disclose “the content or any information generated” in mediation, and courts must disregard any evidence stemming from it. (The only exception is that a signed mediated settlement agreement may be disclosed for enforcement or to challenge it under Section 28). This statutory confidentiality aligns with arbitration’s confidentiality obligations and is intended to give parties confidence that candid discussions will be protected.
- Enforceability: Perhaps the most consequential provisions are Sections 27–28. Section 27(1) declares that a mediated settlement agreement, once signed by the parties and authenticated by the mediator, “shall be final and binding on the parties”. Subject to narrow exceptions in Section 28, it is enforceable “in the same manner as if it were a judgment or decree passed by a court”.
In practice, a party can file the agreement in court, and it will be treated akin to a consent decree. Section 28 enumerates limited grounds to set aside a settlement: (i) the agreement was induced by fraud, corruption or misrepresentation, (ii) a signatory was impersonated, or (iii) the subject matter was not mediable under Section 6.
These grounds mirror the approach taken to arbitral awards (Section 34 challenges) but are even stricter and time-barred (notice of challenge within 90 days). By making mediated agreements effectively self-executing as decrees, the Act eliminates the historical uncertainty of enforcing out-of-court settlements.
- Amendments to Other Laws: The Mediation Act amends the Commercial Courts Act and several other statutes. As noted, Section 12A of the Commercial Courts Act was revised to refer settlements to Sections 27–28 (enforceability under the Mediation Act).
The Act also adds a whole Chapter V to the Consumer Protection Act, 2019 (Sections 37A–37B) for mediation of consumer disputes, prescribing a seven-day window for consumer commissions to record mediated settlements and declare orders accordingly. In effect, the Mediation Act harmonizes mediation into India’s civil procedure and ADR ecosystem, ensuring settlements have the force of law.
Mediation Clauses in Commercial Contracts
Commercial contracts today frequently incorporate mediation clauses as part of their dispute resolution clauses. Such clauses typically require the parties to attempt mediation (often under specified rules) before resorting to arbitration or litigation. The clauses vary.
For instance, the Indian Dispute Resolution Centre (IDRC) provides a standard clause stating that “the parties may at any time… seek to settle any dispute arising out of or in connection with the present contract in accordance with the IDRC Mediation Rules, 2019”. Another version commits the parties “in the first instance” to discuss and consider mediation of any dispute. Specialized institutions give more elaborate examples: the International Arbitration and Mediation Centre (IAMC) of Hyderabad suggests a “mediation/conciliation first” clause:
“In the event of any dispute … the parties shall, in the first instance, refer the dispute to conciliation (also referred to as Mediation) under the IAMC Mediation Rules. Such reference shall be by way of a notice in writing… which will be a notice for commencement of conciliation”.
IAMC also provides a med-arb model clause, whereby parties agree that if the 45-day mediation fails, the dispute will thereafter be “referred to arbitration” under specified rules. For example, IAMC’s Med-Arb clause recites that the parties will first mediate under IAMC rules, but if unresolved within 45 days (or agreed extension), then the dispute “shall thereafter be referred to arbitration” under the IAMC Arbitration Rules. These clauses often clarify that any partial settlement during mediation will be recorded as an arbitration award on agreed terms.
These model clauses illustrate key features of mediation clauses: they bind parties to attempt mediation, sometimes designate an institutional framework or panel, and often couple mediation with arbitration in the hierarchy of remedies. Under Indian law, a standalone mediation clause (without an arbitration fallback) is enforceable as a contractual obligation to negotiate in good faith but does not itself confer a legally binding remedy if mediation fails.
In practice, courts will not dismiss a suit for mere failure to mediate unless Section 12A applies. However, parties can bargain that breach of the mediation clause entitles the other side to proceed immediately to arbitration or court. A hybrid clause like med-arb effectively creates both a mediation phase and then a binding arbitration agreement. The law now gives these clauses added weight: for commercial contracts within the scope of Section 12A, compliance with the mediation clause is mandatory, and any negotiated agreement has statutory backing as a decree.
In drafting mediation clauses, care is needed. Clauses should specify the mediation procedure (institutional rules, timeframes, etc.) and the implications of settlement or failure. Some clauses emphasize preserving other rights, e.g. allowing parties to seek interim relief during mediation, or clarifying that any partial settlement will be binding.
Courts generally uphold mediation clauses as valid contract terms, but have also held that if a contract contains both mediation and arbitration clauses, they must be interpreted consistently.
Overall, inclusion of mediation clauses in commercial contracts is on the rise in India. Such clauses reflect confidence that mediation can resolve disputes efficiently. Recent legal reforms (especially the Mediation Act) have given these clauses more muscle: a settled dispute in mediation is now enforceable as a court decree, giving assurance that negotiated resolutions will stick. Parties drafting contracts should consider mediation clauses as an initial step in their dispute resolution ladder, often paired with arbitration clauses, to harness the best features of both processes.
Mediation versus Arbitration in Commercial Disputes
Mediation and arbitration are both recognized forms of ADR in commercial disputes, but they differ fundamentally in process and outcome. In arbitration, the parties submit their case to one or more arbitrators who act much like judges: they hear evidence and argument, then issue an award that resolves the dispute on its merits. This award is usually binding and enforceable.
By contrast, mediation is a non-decisional process: a neutral mediator helps the parties negotiate but does not impose a solution. Any settlement arises from the parties’ voluntary agreement, not from a ruling.
These differences have practical implications. An arbitration award (domestic) has automatic enforceability: under Section 36 of the Arbitration Act, it becomes a decree after the challenge period, with only limited grounds (public policy, jurisdiction, etc.) to set it aside. A mediated settlement under current law also becomes enforceable, but through a different mechanism.
Once signed, a mediated agreement is “final and binding” under Section 27 of the Mediation Act, and can be enforced like any court decree. A party seeking enforcement can simply file it in court as a judgment. However, unlike an arbitration award, the mediated settlement is not itself an adjudicatory award – it is essentially a contract made into a decree by statute.
Flexibility and formality also differ. Arbitration is more formal and structured (often governed by detailed institutional rules or Part I of the Act), with fixed timelines (e.g. the 12/18-month timeline under the Arbitration Act) and procedural steps akin to a trial. Mediation is informal and party-driven: the schedule, location, and style can be tailored to the parties’ needs (some may mediate online or in person, and share or keep confidential any documentation).
Mediation generally tends to be faster and less expensive than arbitration because it avoids evidentiary hearings. Moreover, mediation emphasizes preserving relationships through collaborative problem-solving, whereas arbitration is adversarial and outcomes are imposed.
Consent and confidentiality are emphasized in both, but with nuances. Both processes are private, but mediation now enjoys explicit statutory confidentiality: Section 23 of the Mediation Act forbids disclosure of mediation communications in court. The Arbitration Act similarly includes implied confidentiality, with its 2019 amendment mandating that arbitrations are confidential absent contrary agreement.
Another distinction is that arbitration awards can be appealed under very narrow grounds (basically none after 2015 amendments) whereas mediation settlements, once executed, are not appealable on merits at all – they can only be challenged as set forth above (fraud, etc.). This finality means that a mediated compromise, once court-endorsed, cannot be re-litigated on the substantive issues, whereas an arbitration award can face post-award challenge or even be annulled and remanded in rare cases.
Enforceability of Mediated Settlements under the Mediation Act
A pivotal innovation of the Mediation Act 2023 is the statutory enforceability of mediated settlements. Prior to this Act, a settlement reached outside court had to be enforced as a contract or recorded as a consent decree under the CPC (Order XXIII), often requiring fresh litigation to make it binding. Now, Section 27 of the Act explicitly provides that a mediated settlement agreement “shall be final and binding on the parties”.
Once signed by the parties and authenticated by the mediator, it is given legal status akin to a judicial decree. Section 27(2) further mandates enforcement of the settlement “in the same manner as if it were a judgment or decree passed by a court”. In effect, a mediated settlement can be enforced through execution proceedings like any other court decree.
The Act also specifies who can enforce and when. Any party to the mediation (or person claiming under them) may invoke the settlement in subsequent proceedings, for instance as a defense or via summary execution. This brings certainty: parties can rely on the agreement with confidence, knowing it cannot be easily undone. However, finality is tempered by limited safeguards.
Section 28 lists the only grounds on which a mediated settlement can be challenged in court: that it was procured by “fraud, corruption or misrepresentation”, involves impersonation of a party, or pertains to disputes outside the Act’s definition of mediated matters. No broad appeals on merits or procedural technicalities are permitted. Any challenge must be filed within 90 days of the agreement (extendable by the court for sufficient cause), otherwise the settlement stands.
These provisions greatly strengthen mediated outcomes. For example, a commercial contract dispute mediated to settlement will henceforth yield an agreement enforceable as a decree, just like a judgment after trial. This mirrors the effect of Section 12A: as discussed, pre-suit mediated compromises already carried decree effect.
The new Act extends this principle to all mediated settlements, whether court-referred or privately negotiated. Thus, breach of a mediated settlement is remedied by decree-enforcement rather than ordinary breach-of-contract suits.
Scholars have noted this as a major advance: a mediated agreement is now “final and binding” and “enforceable as a decree or judgement of a court”. At the same time, the possibility to challenge on extremely narrow grounds provides quality control. The only substantive difference from an arbitral award is that arbitration law allows slightly wider grounds of challenge (e.g. violation of public policy), whereas mediation challenges are more limited.
Overall, under the Mediation Act’s scheme, parties can achieve settlement with nearly the same legal certainty and enforceability as they would under arbitration or trial outcomes, but without a third-party adjudicator deciding their dispute.
Judicial Pronouncements on Mediation
Indian courts have steadily developed jurisprudence around mediation, often in tandem with statutory changes. The Supreme Court’s landmark Salem Advocate Bar Assn. v. Union of India, AIR 2005 Supreme Court 3353 was among the first to extol ADR; it held that procedures should not choke justice and encouraged courts to amend civil procedure rules to facilitate ADR.
More recently, the apex court in Patil Automation v. Rakheja Engineers (2022) underscored Section 12A’s force: a two-judge Bench unanimously ruled that pre-institution mediation under the Commercial Courts Act is mandatory, and non-compliant suits must be summarily dismissed. This decision settled earlier doubt and made pre-suit mediation non-negotiable for qualifying commercial suits, reinforcing the statutory directive.
In Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (2010), the Supreme Court gave crucial interpretation of CPC Section 89. The Court clarified that terms “mediation” and “judicial settlement” in Section 89 refer to court-conducted processes (such as Lok Adalats) and not to private settlments among lawyers. It also held that judges cannot decline to consider ADR on the ground of difficulty in reaching agreement – they must actively formulate possible settlement terms for parties’ consideration.
Afcons thus put teeth into Section 89, instructing courts to genuinely engage parties in dialogue. Subsequent High Court rulings have mirrored these principles. For instance, the Punjab and Haryana High Court (in the Rakheja case) emphasized that litigation is meant for substantial justice and should not be obstructed by mere technicalities, implying that mediation’s spirit is to advance justice.
On the enforceability front, no reported Supreme Court decisions have directly construed the 2023 Act as yet, but judgments underlie the rationale. The Court has long recognized that a voluntary settlement once accepted in court becomes final.
Now the Act’s Sections 27–28 effectively codify similar outcomes: courts can only intervene for fraud or mischief. Lower courts have upheld mediated terms as binding. In consumer, company, or family law cases, unchallenged mediated compromise terms have repeatedly been treated as final orders. The formal recognition of mediated agreements by the new law is therefore consistent with this judicial ethos.
However, courts have also imposed limits. Courts have invalidated one-sided “umbrella” clauses requiring all disputes to be mediated in India as contrary to the Arbitration Act’s pro-arbitration scheme. Such cases highlight that any mediation clause must be mutual and reasonable.
Courts also generally require that the authorized representatives signing a mediated settlement have proper authority; mediation agreements signed under duress or by unauthorized persons can be set aside as fraud or non-estoppel. But the narrow grounds in Section 28 mirror these traditional safeguards.
Overall, both the Supreme Court and High Courts have signaled strong support for mediation as a desirable ADR process in commercial disputes. The new Act largely incorporates the courts’ pronouncements into statutory form: it mandates enforcement of settlements and curtails frivolous challenges. Future litigation will likely refine the contours (for example, clarifying interplay of Sections 89 and 5 of the Mediation Act, or interpreting the limited challenge grounds), but the current trajectory is clear – Indian judiciary views mediation as a valuable, though primarily party-driven, means of resolving business disputes.
Institutional Mediation and Emerging Challenges
India now has a diverse array of institutional support for mediation, but systemic challenges remain. By statute, Mediation Service Providers (MSPs) can include court-annexed centers, accredited institutions, or authorities under the Legal Services Authorities Act, 1987.
In practice, this encompasses Supreme and High Court Mediation Centers (e.g. Delhi High Court’s Mediation & Conciliation Centre), District Mediation Centers, and third-party providers. The Mediation Council of India (to be constituted) will recognize and monitor these MSPs, ensuring they maintain qualified mediator panels and proper infrastructure.
Private institutions have flourished: for example, the Mumbai Mediation Centre, Hyderabad-based IAMC, Chennai’s International ADR Chamber, and industry groups have all launched mediation services. Online platforms and “e-mediation” initiatives (accelerated by COVID-19) have also emerged, offering virtual mediation to further accessibility.
The government and courts have issued pilot rules – for instance, Bombay’s CP – ADR& Mediation Rules, 2006 and updated civil rules in some High Courts to encourage early mediation referrals. Specialist training programs, such as the Supreme Court’s annual mediation skills workshop and various law school courses, aim to build mediator capacity.
Despite this infrastructure, usage of mediation in commercial disputes remains limited. Empirical data suggest that judges and lawyers are still not fully attuned to mediation. Studies note a “lack of referrals” – even though Section 89 CPC authorizes mediation, many courts either overlook it or send cases to ADR in name only. As one commentator observes, parties are often unaware of mediation’s advantages and may distrust it.
Judicial behavior is influenced by competing incentives: judges may focus on case disposal statistics and prefer to resolve cases themselves rather than refer them out for ADR. Many court-annexed mediations have been handled by busy judges or senior advocates who lack specialized mediation training. This “mediation management” gap means settlement rates remain low.
A related challenge is funding: comprehensive mediation requires dedicated facilities and staff, but budgets for such centers have been minimal or absent. Even when mediation centers exist, they are often shared with arbitration or other ADR functions, diluting focus.
Cultural factors also play a role. Commercial litigants and their counsel may perceive mediation as a “soft” option, fearing it concedes bargaining power. Without enforcement teeth (until 2023) or clear mandates outside Section 12A, parties have opted to litigate or arbitrate directly. There is also confusion about mediation’s voluntary nature: some parties wonder if they can be forced to mediate (the law is now clearer on that, but practice lags).
Finally, the quality of mediators is uneven. The Mediation Act requires mediator registration and ongoing accreditation by the prospective MCI, but currently there is no unified credential system. Some mediators have extensive training, while others rely solely on professional reputation.
To address these gaps, ongoing efforts are crucial. The recent statutory reforms themselves may help change mindsets: knowing that a mediated settlement is binding by law should incentivize sincere participation. The establishment of the Mediation Council of India holds promise for standardizing training and ethics.
Meanwhile, civil courts and commercial courts are increasingly issuing referral orders under Section 89 and Section 5 of the Mediation Act, helping build a mediation culture. Bar associations and legal services authorities are conducting awareness campaigns.
Conclusion
Mediation has emerged as an essential component of corporate dispute resolution in India. From its modest beginnings as a court-referred possibility (CPC §89) and a pilot service, it is now embedded in the fabric of commercial law through statutes and judicial enforcement.
The evolution culminates in a statutory framework that not only recognizes mediation (in legislation and contracts) but also ensures mediated outcomes carry full legal effect. Compared to arbitration, mediation offers a non-adversarial, party-controlled path that can save costs and preserve business relationships – attributes especially valuable in commercial contexts.
The new Mediation Act, by guaranteeing enforceability of settlements and protecting confidentiality, has closed the historical gap between agreement and execution. Nevertheless, realising mediation’s full potential depends on continued institutional development: more trained mediators, robust institutional capacity, and broader adoption by courts and practitioners.
For corporate parties and counsel, the message is clear: engage with mediation proactively. Incorporate well-drafted mediation clauses in contracts. When disputes arise, be open to mediated settlement as a viable means of resolution. With legal backing now firmly in place, companies can use mediation confidently, knowing that a negotiated settlement will stand up to judicial scrutiny.
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