## Facts

- A Brazilian cotton exporter sold cotton to a Belgian buyer, financed through two irrevocable letters of credit ($7,000 and $3,500) issued by a New York bank at the request of a Belgian bank.
- The credits required presentation in New York by May 15, 1940 of 90-day drafts with specified shipping documents, including a “full set of bills of lading,” for cotton shipped C.I.F. to Ghent/Antwerp.
- The exporter shipped cotton in two lots on the S.S. *Mar del Plata* and received two original bills of lading per shipment (two originals constituted the set).
- One original from each set was sent by air mail and the other by sea; by the May 15 expiry date, only the air-mailed original for each shipment had arrived in New York.
- The exporter’s collecting bank presented the drafts with one original bill of lading for each shipment plus a written indemnity guaranteeing the issuing bank against any loss from honoring without the missing original.
- The issuing bank did not object to the indemnity’s form or the guarantor’s creditworthiness, but refused to honor the drafts for (1) lack of a “full set” of bills of lading and (2) failure to prepay freight because the shipment was “freight collect.”
- Evidence showed an established New York banking custom to treat one original bill of lading accompanied by a prime bank’s indemnity as the equivalent of a “full set” for letter-of-credit purposes.
- After a bench trial, the district court ruled for the bank based on nonconforming tender; the exporter appealed.

## Issues

1. Whether a presentation of one original bill of lading plus an indemnity from a prime New York bank satisfied the letter of credit requirement of a “full set of bills of lading” in light of established banking custom.
2. Whether the issuing bank could dishonor drafts because freight was not prepaid on a shipment described as C.I.F., where the exporter shipped “freight collect” and deducted freight from the invoice price.

## Decision

- The Second Circuit reversed the judgment for the bank and directed entry of judgment for the exporter for the amounts due under both letters of credit.
- The court held that, given established New York banking usage, one original bill of lading accompanied by a responsible bank’s indemnity satisfied the “full set of bills of lading” requirement.
- The court further held that the issuing bank could not dishonor on the freight objection under the circumstances presented.

## Legal Principles

- Letter-of-credit documentary requirements may be construed in light of established and widely known mercantile and banking usage applicable to the relevant market.
- “Strict compliance” is assessed by what the parties in the relevant trade would understand the documentary terms to require; usage may supply the commercial meaning of a term such as “full set of bills of lading.”
- Where the commercial risk addressed by a required document is fully covered by an accepted substitute—such as a prime bank’s indemnity against consequences of a missing original—dishonor based solely on the missing duplicate original is improper.
- A bank may not refuse payment on purely formal objections when the documentary presentation, as understood through trade usage, satisfies the credit’s commercial function and risk allocation.

## Conclusion

The Second Circuit required the confirming/issuing bank to honor the drafts because established New York banking practice treated one original bill of lading plus a prime bank indemnity as satisfying a “full set” requirement, and the bank’s additional freight-based objection did not justify dishonor under the credits.


Dixon, Irmaos & Cia. Ltda. v. Chase Nat'l Bank, 144 F.2d 759 (2d Cir. 1944)