Letters of Credit Reviewer (book)

The Letter of Credit Transaction A BOE can be understood by comparing it with a check.
Bill of Exchange Check
Maker Seller Buyer
Introduction
Drawee Buyer Bank
Payee Buyer Seller or Creditor
The seller protects himself by discharging all his obligations at the point
of export and receiving payment for the documents before the goods
arrive. This basically means that the seller wants a sale of documents The Banks Role
not a sale of goods so he does not have to pay warehouse costs and give
the buyer inspection rights. As Acceptor
However, the buyer may withdraw from the contract for reasons such as A time draft is one wherein the documents are accepted by the buyer and
bankruptcy, break in the price, dissatisfaction with the quality of prior he has a period of time (usually 90 days) to pay. He does not pay at once
shipments, governmental controls or allocation of foreign exchange. As like a draft payable on sight. The time draft is more attractive to the buyer
such, the buyer would reject payment upon presentation of the but not for the seller because he parts with his security interest (he parts
documents. The seller is left with the documents (and control of the with the documents control over the goods).
goods) and a cause of action. However, he doesnt want that He just To make things better for the seller, he provides for a draft drawn on and
wants to deliver the goods and get paid. accepted by the buyers bank rather than the buyer himself. Whether
The answer to this dilemma is an assurance from someone he can trust buyers bank will want to take some security interest in the goods as a
that when he tenders the documents, they would be paid. This is the condition for accepting the sellers draft depends on the banks confidence
reason why letters of credits were invented. Through this, the buyer is on the buyer. Basically, the seller would rather deal with a bank rather
assured of being paid. In short, the risk passes from the seller to the than with the buyer especially when the transaction involves a time draft.
bank. In case the buyer reneges from his obligation, it is the bank which
goes after him. The seller is happy because he has been paid and As Currency Converter
doesnt really care about the buyer and the bank anymore. Of course the Since letters of credit usually involves international transactions, the
bank does assume the risk out of the kindness of its heart (la naman currency used by the buyer and seller are different. The bank does the
heart ang bangko e). It agrees to assume the risk for a fee. conversion.

As a Post Office
The Method of Payment and the Exchange of documents usually involves agents of both parties. The
Role of the Bank buyer may have his agents on the sellers country or vice versa.
Nowadays, such task of delivering the documents is done by banks. The
seller delivers the documents to the banks branch in his country and the
The Draft or Bill of Exchange buyer gets the said documents from the banks branch in the buyers
country.
The documents that the seller tenders to the buyer consists of a
o Bill of lading As Export Financier
o Insurance policy If the seller has not yet presented the bill to the buyer, it must be
o Commercial invoice accompanied by the shipping documents. In case of a time draft, seller
However, other documents may be added depending on the agreement may discount the accepted bill called a trade acceptance if the buyer
of the parties and other factors such a laws. These include accepted it and a bankers acceptance if the buyers bank did. In that
o Export licenses case, shipping documents no longer accompany the draft but the
o Draft or bill of exchange discounting bank can rely on the acceptors credit.
Draft or Bill of Exchange can be used interchangeably.
 Letters of Credit Reviewer (book)
The Letter of Credit
Involves at least three parties:
o Seller or the beneficiary
o Buyer or the applicant
o Issuing or opening bank
In the cases, we learn that more parties can be added depending on the
agreement of the parties. (e.g. notifying bank and confirming bank)
What is the process involved in using the letter of credit?
o Buyer submits an application to his bank for the letter of credit
which contains:
Description of the transaction
Amount to be paid
Documents required to accompany the draft
Bill of lading
Insurance policy
Certificate of quality
Etc.
Period within which the credit is to be available
Any special instructions that may be pertinent
o The bank will examine the circumstances of the buyer. If he is
satisfied, it will inform the seller that a credit in his favor has
been opened and that it will honor drafts drawn against it
during the time period specified if accompanied by the
documents listed.
The seller need not respond to this information
If he does not draw on the credit, he is not liable to the
bank
o Disputes between the seller and buyer do not concern the bank.
o An irrevocable letter of credit is not subject to a stop
payment order.
Urquhart Lindsay and Company Limited v. Eastern Bank Limited
Parties
o Urquhart (Seller in London) manufacturers of machinery
o Eastern Bank (London with branch in India) bankers
o Benjamin Jute Mills (Buyer in Calcutta) buyer
Urquhart agreed to manufacture for Benjamin a quantity of machinery
for delivery FOB Glasgow for 64,942.
Terms of the Contract
o Delivery of machinery to Benjamin
o FOB Glasgow
64,942 price
The bank must pay if the documents are good regardless of its knowledge.
o In the event of any increase taking place in wages or cost of
materials or transit rates or any further reduction taking place in
working hours, Urquharts prices would be correspondingly
increased.
o Benjamin should open in this country (London) a CONFIRMED
IRREVOCABLE BANKERS LETTER OF CREDIT to the
extent of 70,000.
o Eastern Bank wrote to Urquhart claiming that an irrevocable
letter of credit was made for the benefit of the latter and that the
former would pay any bills drawn on said credit up to the amount
of 70,000. Eastern, however, also told Urquhart that the bills
should be accompanied by the complete documents covering
shipments of machinery to Calcutta, to be drawn payable 30 days
after sight.
Urquhart bought the needed raw materials and manufactured the goods. It
made two shipments and tendered to Eastern Bank the bills of exchange
together with the shipping documents. Eastern paid the bills.
An increase was made by Urquhart because of the increase in the cost of
labor.
Eastern Banking wrote to Urquhart saying that the extra amount would be
referred to the Buyer (Benjamin) before the former (Eastern Bank) could
pay the bill.
Eastern refused to meet the bills of exchange presented by Urquhart for
payment of the third shipment. It finally did so under protest but only
after the confirmed credit had expired.
Urquhart claims there was a breach of contract by Eastern Bank contained
in the letter sent by latter. (This was the letter wherein Eastern told
Urquhart that there was a letter of credit and that the former would pay the
bills drawn on such credit.) As such, it refused to give the documents
without being paid the additional costs.
Eastern Bank, on the other hand, claims that it was a condition of the
contract between Urquhart and Benjamin that Urquhart should not draw
bills of exchange for more than the price agreed upon by them. As such,
the bills should not include increases in costs. Eastern claims that
Urquhart breached this condition.
Justice Rowlatt decided the case.
He ruled that there was a breach of contract by Eastern Bank because the
agreement involved an irrevocable letter of credit. Eastern Bank
undertook to pay the amount of invoices for machinery without
 Letters of Credit Reviewer (book)
qualification. It should have accommodated the letter of credit. In
short, the bank is not concerned with the underlying contract. The letter
of credit is independent of such contract. As long as the proper
documents are presented by the seller, the bank should respect the bills.
Justice Rowlatt also decided on the issue of damages. He said that if the
letter of credit was not irrevocable, the damages would be limited to the
specific shipment being made. However, since it was irrevocable, the
bank agreed to buy the contemplated series of bills and documents
representing the contemplated shipments just as the buyer agreed to take
and pay for by this means the goods themselves. As such, the refusal of
the bank to take and pay for the bills with the documents representing
the goods is the same as a repudiation of their contract to take the bills
to be presented in future under the letter or credit. The amount of
damages should be the same as in that case.
The damages Urquhart is entitled to is the difference between the value
of the materials left on its hands and the cost of such as it would have
further provided, and, on the other hand, what it would have been
entitled to receive for the manufactured machinery from the buyers, the
whole being limited to the amount they could in fact have tendered
before the expiry of the letter of credit.
Notes
o This case teaches us that the bank may not do what the buyer
wants at the expense of the seller. The letter of credit is for the
protection of the seller and such purpose would be disregarded
if the abovementioned situation is allowed.
o The banks breach is not just a failure to pay a sum of money.
The seller is entitled to treat the entire contract as wrongfully
repudiated and to collect his full anticipated profits. Thus, for
damage purposes, the bank is treated like the buyer.
o This case basically says that the relation between the bank and
the seller is wholly separate from the contract between the
seller and the buyer.
Maurice OMeara Co. v. National Park Bank of New York (Test)
Parties
o Buyer Sun Herald Corporation (New York)
o Seller Ronconi & Millar (assigned its rights to OMeara)
o Issuing Bank National Park Bank (New York)
Terms of the Letter of Credit
o Irrevocable
o $224,853.30
o 1233 2/3 tons of newsprint paper
o Delivery to be made in December 1920 and January 1921
o Drafts to be drawn at sight
o Documents Required
Commercial Invoice in triplicate
Weight Returns
Negotiable Dock Delivery Order
The National Park Bank of New York sent a letter to Ronconi &
Millar informing the latter of a letter of credit in its favor opened by
Sun-Herald Corporation. Three drafts were issued by the seller
(Ronconi & Millar). The first draft was accompanied by:
o Commercial invoice in triplicate
o Affidavit of Elwin Walker
o Full Weight Return in triplicate
o Negotiable dock delivery order
The documents that accompanied the second draft were the similar to
those which accompanied the first.
The bank refused to honor the draft because it alleged that the seller was
required by the letter of credit to furnish evidence reasonably
satisfactory that the paper shipped to the buyer was of a bursting or
tensile strength of 11 to 12 points at a weight of paper of 32 pounds.
The parties then agreed that the bank would conduct a test of the delivered
paper to see if it complied with said bursting tensile strength. The test
performed indicated that the paper was not of the quality required.
Since the transaction was halted by refusal to pay the draft, the seller sold
the paper to some other buyer at a loss.
A motion for summary judgment by the seller was denied. The Court of
Appeals affirmed the decision of the trial court.
The basic question is should the motion for summary judgment be
granted?
The Court ruled that the motion for summary judgment should be granted.
The bank issued to sellers assignor an irrevocable letter of credit which is
a contract between the bank and OMeara wherein the bank agreed to pay
sight drafts to a certain amount on presentation to it of the documents
specified in the letter of credit. This contract between the bank and the
assignor is not connected to the contract for the purchase and sale of the
paper. The banks obligation was to pay sight drafts when presented if
accompanied by genuine documents specified in the letter of credit. If the
paper did not correspond to what had been purchase, either in weight,
kind or quality, then the purchaser had his remedy against the seller for
damages. However, the bank is not concerned with all this. It had no
obligation to ascertain whether the paper conformed to the contract
 Letters of Credit Reviewer (book)
between the buyer and seller. The bank was concerned only in the drafts
and the documents accompanying them.
Simply put, the bank should not concern itself with the agreement
between the parties. As long as the documents required in the letter of
credit are present, it has the obligation to pay. It had no right to insist
that a test of the tensile strength of the paper be made before paying the
draft. It did not even have the right of inspection before payment to
determine whether the description in the documents matched the goods
delivered. All that the letter of credit provided is that the documents be
presented which described the paper shipped as of a certain size, weight
and tensile strength. To hold otherwise would read into the letter of
credit something which is not there, and this would defeat the primary
purpose of such letters of credit which is an assurance to the seller of
prompt payment against the documents.
The Court, however, explained that such right of inspection and
examination is not entirely prohibited. If such are included in the letter
of credit, the bank has the right and the duty perform such things. In
this case, there was no such provision so the bank should not have
examined the goods and required a test.
As to the loss suffered by the seller, the bank should be liable for
$20,064.79 because that is the price of the loss in reselling the paper.
Justice Cardozo Dissents
o There is no obligation on the part of the bank to conduct an
investigation. (He agrees with the majority decision in this
respect.)
o However, if it chooses to investigate and discovers that the
merchandise tendered is not in truth the merchandise which the
documents describe, it should not be forced by the delinquent
seller to make payment irrespective of its knowledge. (The
majority decision says that knowledge of the insufficiency of
the goods is immaterial the bank should still pay despite such
knowledge.)
o Following the decision of the majority, the bank would be
helpless even if the goods delivered were actually rags but the
documents were sufficient as to their face.
o A bank which pays a draft upon a bill of lading misrepresenting
the character of the merchandise may recover the payment
when the misrepresentation is discovered or the very least
different between the value of the things described and the
value of the thing received.
o As such, the decision of the Court of Appeals should be
affirmed.
o He basically says that although the bank has no obligation to
inspect, if such inspection is conducted, the results should not
merely be disregarded.
Notes
o OMeara case restates the holding in Urquhart Lindsay that the
relation between the issuing bank and the seller is wholly
separate from the contract between the seller and buyer. It
carries further the discussion of the role of the bank. It states that
if the bank is not under an obligation to inspect the goods (not in
the letter of credit), it has not right to do so either. All the bank is
entitled to look to are the shipping documents. If these are in
order, the bank must pay.
How Irrevocable is Irrevocable?
Enjoining the Issuing Bank
Sztejn v. Henry Schroder Banking Corporation
Parties
o Buyer Sztejn
o Seller Transea Traders, Ltd. (India)
o Issuing Bank Schroder Banking Corporation (NY)
o Confirming Bank Chartered Bank (India)
Terms of the Letter of Credit
o Irrevocable
o Delivery of bristles
o Documents Required
Invoice
Bill of lading
Sztejn bought a quantity of bristles from Transea. Sztejn contracted with
Schroder for the issuance of an irrevocable letter of credit to Transea. The
letter of credit was delivered to Transea. Transea then placed 50 cases of
material on board a steamship, procured a bill of lading and the necessary
invoices. These documents describe the bristles called for by the letter of
credit. However, it was discovered that the 50 crates actually contained
cowhair and other worthless material. Transea then presented a draft and
the necessary documents to Chartered Bank at India for the collection of
the amount.
Sztejn filed a complaint praying that the letter credit and the draft be
declared void and an injunction to prevent the payment of the draft.
 Letters of Credit Reviewer (book)
The Court ruled that is well established that a letter of credit is
independent of the primary contract of sale between the buyer and the
seller. This rule is necessary to preserve the efficiency of the letter of
credit as an instrument for the financing of trade. The banks should not
look behind the documents unless the letter of credit so provides.
However, the application of this doctrine presupposes that the
documents accompanying the draft are genuine and conform in terms to
the requirements of the letter of credit.
In the case at bar, the controversy is not merely one for breach of
warranty. It is assumed that the seller intentionally failed to ship any
goods ordered by the buyer. The principle of the independence of the
banks obligation under the letter of credit should not be extended to
protect the unscrupulous seller.
Note that the court stressed on the fact that the bank had not yet paid the
draft. It explained that if despite such fraud, the bank had already paid
in good faith, it would not be held liable.
The fact that fraud justifies nonpayment is supported by a previous
decision of the Court which states that when the issuer of a letter of
credit knows that a document, although correct in form is, in point of
fact, false or illegal, he cannot be called upon to recognize such a
document as complying with the terms of a letter of credit.
The court also said that although the bank is not interested in the exact
detailed performance of the sales contract, it is vitally interested in
assuring itself that there are some goods represented by the documents.
Furthermore, the Chartered Bank is not a holder in due course but is a
mere agent for the collection of the account of the seller.
Attaching the Proceeds of the Draft
United Bank Limited v. Cambridge Sporting Goods Corporation (Holders in
Due Course)
Parties
o Buyer Cambridge (New York)
o Seller Duke (Pakistan)
o Financing Banks United and Muslim in Pakistan
o Issuing Bank Manufacturers (New York)
Terms of the Letter of Credit
o Irrevocable
o Payable 90 days after sight
o 27,936 pairs of boxing gloves
o $42,5756.80
o Requires presentation of certain documents (the case does not
state what specific documents are required)
Cambridge entered into a contract with Duke Sports wherein the former
would manufacture for the latter boxing gloves. United and Muslim were
to finance the sale. These two banks requested Cambridge to open an
irrevocable letter of credit with Manufacturers. Manufacturers issued an
irrevocable letter of credit in favor of Cambridge.
Following the opening of the letter of credit, Duke informed Cambridge
that it would be impossible to manufacture and deliver the merchandise
within the time period required by the contract and sought an extension of
time for performance and a continuation of the letter of credit. Cambridge
refused and cancelled the contract informing both Duke and United of the
cancellation.
Despite the cancellation of the contract, Manufacturers received
documents from United and Muslim evidencing shipments of the boxing
gloves. However, upon inspection of these shipments, it was discovered
that Duke merely shipped unpadded, ripped and mildewed gloves rather
than the new gloves to be manufactured as agreed upon.
Cambridge commenced an action against Duke in the Supreme Court of
New York where it successfully obtained a preliminary injunction
prohibiting Manufacturers from paying drafts drawn under the letter of
credit. Cambridge then levied the funds subject to the draft. Duke
defaulted and the judgment became final.
United and Muslim instituted the present case to vacate the levy made by
Cambridge claiming that they were holders in due course of the drafts. As
such, they should be paid.
The trial court ruled that the banks were holders in due course and had to
pay. It held that the burden of proving that the banks were not holders in
due course lay with Cambridge and Cambridge was unable to prove such
fact. The Court of Appeals affirmed the decision of the trial court.
The New York Court of Appeals ruled that the banks should not be paid.
The defense of fraud in the transaction was established and because of
this, the burden shifted to the banks to prove that they were holders in due
course and took the drafts for value, in good faith and without notice of
any fraud on the part of Duke. This is pursuant to Section 3-307 of the
UCP which changes the burden of proof to the one claiming to be a holder
in due course when fraud is established.
The Court cited Article 5 of the UCP which enumerates the duties and
obligations of the issuer. It explained that a letter of credit is a
commitment on the part of the issuing bank that it will pay a draft
presented to it under the terms of credit. Banks issuing letters of credit
deal in documents and not in goods and are not responsible for any breach
of warranty or nonconformity of the goods involved in the underlying
 Letters of Credit Reviewer (book)
sales contract. This duty of the issuing bank, however, has limitations
such as fraud in the transaction and the holder has not taken the draft in
circumstances that would make it a holder in due course. In such a case,
the customer may apply to enjoin the issuer from paying drafts drawn
under the letter of credit.
It is important to note the Cambridge established that Duke was guilty of
fraud in shipping not merely nonconforming merchandise, but worthless
fragments of boxing gloves. This is important because that is what
differentiates it from the Urquhart case which involved only warranty.
There was also an issue on the admission of the interrogatories. United
and Muslim used as evidence the interrogatories of Cambridge. In
short, such interrogatories were the evidence of Cambridge but the
lower courts allowed the two banks to use such interrogatories to prove
their holder in due course status. This should not have been allowed.
Hamzah Malas & Sons v. British Imex Industries, Ltd.
Parties
o Buyer Hamzeh Malas (Jordan)
o Seller British Imex Industries (London)
o Issuing Bank Arab Bank Ltd.
o Confirming Bank Midland Bank Ltd. (London)
Terms of the Letter of Credit
o Delivery of reinforced steel rods
o Shipment and payment in two installments
o Documents required (not specified in the case)
Hamzeh bought from British reinforced steel rods. A letter of credit was
issued by the Arab Bank and confirmed by Midland Bank. Payment and
delivery were to be in two shipments. The first set of drafts were
honored when presented. However, when the goods arrived, the buyer
claimed that they were not up to contract quality and were in several
respects different from the specifications. The buyer then wished to
prevent the payment of the second draft. The buyer was able to obtain
an injunction to restrain the seller from drawing on the letter of credit.
Before the expiration of the letter of credit, the buyer applied for an
extension of the injunction until the dispute between the buyer and seller
could be adjudicated.
Jenkins L.J
o A letter of credit imposes upon the banker an absolute
obligation to pay, irrespective of any dispute there may be
between the parties as to whether the goods are up to contract
or not. The letter of credit establishes a system that would
make business easier. This system would break down if a
dispute as between the seller and buyer was to have the effect of
freezing the sum for which the letter of credit was opened.
o As such, there should be no extension of the injunction.
Sellers L.J.
o The court has no jurisdiction in this case to extend the injunction.
Pearce L.J.
o I agree.
How Strict is Strict Compliance
J.H. Rayner and Company, Ltd. v. Hambros Bank, Ltd.
Parties
o Buyer Company in Denmark
o Seller J.H. Rayner and Company (London?)
o Issuing Bank Hambros Bank
Terms of the Letter of Credit
o Irrevocable
o Payable at Sight
o For 16,975
o For shipment of 1,400 tons of Coromandel Groundnuts
o Documents Required
Invoice
Clean on board bills of lading in complete set
o FOB Madras
o Drafts must contain the clause Drawn under confirmed credit
No. 14597.
Hambros Bank received a cable from its correspondents in Denmark (at
that time, it was not yet occupied) wherein it was requested to open an
irrevocable sight credit in favor of Rayner. Hambros Bank opened the
letter of credit and informed Rayner of the same.
Rayner thereafter presented the required documents to the bank.
However, the body of the bill of lading provided for machine-shelled
groundnuts kernels. On the margin were the marks O.T.C. C.R.S.
Aarhaus.
Hambro refused to accept the draft on the ground that the terms of the
letter of credit called for an invoice and bill of lading both covering a
shipment of Coromandel groundnuts, whereas the bill of lading
provided for machine-shelled groundnut kernels. Rayner filed a case in
court claiming breach of contract by the bank.
The trial court (Justice Atkinson) ruled in favor of Rayner. He ruled that
evidence was presented to show that machine-shelled groundnuts were
 Letters of Credit Reviewer (book)
the same as Coromandel groundnuts and such was universally
understood in the nut trade in London. Furthermore, the marginal mark
of C.R.S. was short for Coros or Coromandels and would be
understood in the trade. The bank appealed.
MacKinnon L.J.
o The judgment should be reversed and the case dismissed.
There should be exact compliance with the terms of the letter
of credit. There is no room for documents which are almost the
same, or which will do just as well. If this was allowed,
business would be hampered. If, however, the bank pays based
on almost the same documents, it would do so at its own risk.
o J. Atkinsons decision that the fact that Coromandel
groundnuts are the same as machine-shelled groundnut
kernels are universally understood is wrong. Those in the
Mincing Lane (nut business) know about it. However, such
should not affect the bank. It is impossible and unreasonable to
expect a bank to be affected with knowledge of the customs
and customary terms of every one of the thousands of trades for
whose dealings he may issue letters of credit. It would be
impossible for business to carry con and for bankers to be
protected if this were the case.
Goddard L.J.
o Even if the bank did know of the practice that Coromandel
groundnuts can be described as machine-shelled groundnut
kernels, such would not be conclusive on the case.
o In a letter of credit, the bank is bound to pay the draft if the
terms laid down by the buyer are met. These terms should be
met before payment or else the bank runs the risk of its
customer refusing to reimburse it. It does not matter whether
the terms are imposed by the person who requires the bank to
open the credit seem reasonable or unreasonable.
o The bank made a promise to pay when the proper documents
are presented. Whether or not the bank knew of such custom
or practice is immaterial because its promise is specifically to
pay only for Coromandel groundnuts.
Notes
o The basic point of this case (I dont know if this is the same as
sirs moral of the case) is the bank may not pay if the
documents do not conform regardless of its knowledge. This is
supplementary to The Urquhart and Maurice OMeara cases
which provide that the bank must pay if the documents
conform regardless of its underlying knowledge.
o A probable problem with this ruling is that the documents are
prepared by different people (usually not those involved in the
transaction with the letter of credit). These people who prepare
the documents would not really know or care about the
agreement by the bank, buyer and seller. The bill of lading in
this case, for instance, did not say Coromandel groundnuts but
machine-shelled groundnut kernels. The person who did the
bill of lading thought that this was ok because it was customary
to interchange the two terms. If the seller, however, was the one
who made it, he would have ensured that the term Coromandel
groundnuts was used. As such, practically speaking, this
decision may pose some problems.
Dixon, Irmaos & Cia., Ltda. v. Chase National Bank of the City of New York
Parties
o Buyer Someone in Belgium
o Seller Dixon, Irmaos & Cia in Brazil
o Bank Chase Bank in New York
Terms of the Letter of Credit
o Irrevocable
o $7,000
o Payable 90 days after sight
o Documents Required
Commercial invoice in triplicate
Insurance Certificate
Fill sets of bills of ladings
o CIF Ghent/Antwerp
o Drafts must be marked Drawn under Chase National Bank
Credit No. E71582
Dixon sold cotton to a purchaser in Belgium. At the request of a Belgian
bank (bank of buyer), Chase Bank issued two irrevocable letters of credit
in favor or Dixon (for $7,000 and for $3,500). The important requisites in
the terms are the requirement of a full set of bills of lading and the fact
that it was CIF.
Dixon shipped the cotton to its Belgian customer in two lots, receiving
two bills of lading for each shipment. However, instead if prepaying the
freight, Dixon shipped the goods freight collect and deducted the freight
charges from the invoice price. Dixon was only able to present one set of
the two bills of lading delivered. The other set was still in the mail and
had not yet arrived in New York. In lieu of the other set of bill of lading,
an indemnity agreement or guaranty against loss resulting from its
absence was tendered by the Guaranty Trust Company.
 Letters of Credit Reviewer (book)

Chase Bank refused the draft presented on two grounds: o The Uniform Commercial Code explicitly follows the Dixon rule
o Absence of a fill set of the bills of lading with respect to the obligation of buyers to accept an indemnity in
o Failure to prepay the freight lieu of missing documents.
Dixon claimed that the fact that one of the original bill of lading out of
each set of two was missing did not defeat the adequacy of its tender
because the evidence established the existence of a custom among New
York banks issuing letters of credit to finance a shipment from outside
the United States and calling for a full set of bills of lading, to accept
in lieu of a missing part of the set a guaranty by a responsible New York
bank against any loss resulting from the absence of the missing part. In
simpler terms, Dixon basically argued that there was a New York
custom wherein the term full set of bills of lading is satisfied by a
guaranty by a NY bank.
Chase Bank argued that the law requires strict compliance with the
terms of a letter of credit and that a custom is not admissible to
contradict the unambiguous terms of a written contract. Furthermore,
Chase Bank argued that the reference in the concluding paragraph of the
letters of credit to the Uniform Customs and Practice for Commercial
Documentary Credits excludes incorporation into the contracts of any
other custom.
The district judge ruled that tender of less than a full set of bills of
lading did not comply with the terms of the letters of credit. (Bank
wins.)
The US CA ruled that Chase Bank was not justified in refusing to pay
the drafts. It ruled that it is well-settled that parties who contract on a
subject matter concerning which known usages prevail, incorporate such
usages by implication into their agreements, if nothing is said to the
contrary. As such, the NY custom is deemed incorporated in the
contract to explain the meaning of full set of bills of lading.
Furthermore, the fact that the UCP was mentioned in the letter of credit
does not exclude all other customs. The UCP does not explain the
meaning of full set of bills of lading but the NY custom does.
The second argument that there was a failure to prepay the freight is
likewise untenable. CIF means that it is the seller who pays the freight.
However, there is no indication when he should pay. There is no
uniform practice of such in NY. In this case, the time of payment is
immaterial
Notes
o Note that the Rayner case disregards reasonableness while it is
of primary importance in the Dixon case.