Defining dyadic cost and risk in international trade: a review of incoterms 2000 with strategic implications

INTRODUCTION INCOTERMS, an acronym for International Commercial Terms, are internationally standardized "trade terms" that describe the dyadic obligations of both buyers and sellers in international sales transactions. Moreover, INCOTERMS is a set of 13 terms that clearly allocate the costs, risks, customs, and insurance responsibilities when internationally transporting goods between the buyer and seller. Consequently, it is important to stress that INCOTERMS deal only with the relation between sellers and buyers under a contract of sale. They do not relate directly to the contract of carriage. INCOTERMS were first developed in 1936 by the Paris-based International Chamber of Commerce (ICC) as a set of international rules for the interpretation of trade terms (Barelier et al. 1995). These rules, known as "INCOTERMS 1936," have been subsequently revised. Amendments and additions were later made in 1953, 1967, 1976, 1980, 1990 and presently in 2000 in order to bring the rules in line with current international trade practices. INCOTERMS serve much the same purpose for international trade as the Uniform Commercial Code does for domestic commerce in the U.S. {Journal of Commerce, 1999). It should be stressed that, when the parties intend to incorporate INCOTERMS into their contract of sale, they should always make an expressed reference to the current version of INCOTERMS. Buyers and sellers willing to use INCOTERMS 2000 should therefore clearly specify that their contract is governed by "INCOTERMS 2000." Further, the correct use of INCOTERMS implies that a named port of destination or named place of destination has to be stipulated to be valid, followed by the INCOTERMS version governing their use (e.g., EXW La Crosse, WI--INCOTERMS 2000; FAS Norfolk, VA--INCOTERMS 2000). The trade terms have been put together in four different groups: E, F, C, and D. Group E Group 'E' (for "Ex" or from) represents the minimum responsibility for the seller, and maximum responsibility for the buyer. In this group, the seller is only responsible for making the goods available to the buyer at the agreed place, usually at the seller's premises. Group F Group 'F continues with the seller being "free" of responsibility during the main carriage. Thus, the seller is called upon to deliver the goods to a carrier appointed by the buyer. In others words, he/she is not responsible for the main carriage, only some pre-shipment charges. Group C Group 'C stands for "cost" or "carriage" and means that the seller is responsible for contracting and paying for the main carriage, but without assuming the risk of loss of, or damage to the goods, or additional costs due to events occurring after shipment and dispatch. Group D Finally, group 'D' means "delivery" and rallies five "arrival" INCOTERMS where the seller is responsible for the payment and delivery of the goods to the country of destination. The seller has to bear all the costs and risks needed to bring the goods to the country of destination. Further, INCOTERMS can be classified into two categories from a delivery perspective: 1) departure contracts; and, 2) arrival contracts. "Departure contracts" involve the seller being responsible for delivering to a named place in the country of export or departure country. The seller assumes all costs and risks before crossing a border. Departure contracts involve groups 'E\ T, and 'C Note that the 'C terms are frequently misinterpreted as "arrival contracts." However, it must be stressed that under 'C terms, as under the 'F* terms, the seller fulfills the contract in the country of shipment. Thus, the contracts of sale under the terms 'C falls within the category of "departure contracts." "Arrival contracts" require the seller to bear all costs and risks involved in bringing the goods to an overseas point of delivery. In other words, the seller is responsible for the arrival of the goods at the agreed place or point of destination at the border (DAF) or within the country of destination. …