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I am trying to identify where magento checks for priority while applying rules. Can you point me to the correct place and whether the rules are loaded based on priority? or it happens while rule application.

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Yes, if you created more than one shopping cart price rule , than it checks for priority & apply the 1st rule instead of 2nd..... If you are using Magento 1, you can check Priortiy under Promotions > Shopping Cart Price rules

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