An international sales contract does not fail because the parties disagreed on price. It fails because they disagreed on who bore the cost of getting the goods from one country to another, and on the moment the risk passed from seller to buyer.
Incoterms exist to settle exactly that, and most disputes in cross-border trade trace back to an Incoterm that was never properly specified.
What Incoterms actually do — and what they don’t
Incoterms define the cost, risk, and delivery obligations between seller and buyer. They do not define who owns the goods, when title passes, or what happens if the contract is breached. Those are separate clauses and they need to be written separately.
This is a persistent misunderstanding. A contract that says EXW and nothing about title has left the most important question unanswered.
The rules mode you are working in
EXW — Ex Works. The seller makes goods available at their premises. The buyer bears everything from that point: loading, export clearance, freight, insurance, and all risk. It sounds minimal and it is — EXW allocates almost nothing to the seller, and puts a great deal on the buyer.
FCA — Free Carrier. Similar to EXW, but the seller clears the goods for export and hands them to the carrier nominated by the buyer. Often the practical choice for container shipments.
FOB — Free on Board. Used for sea and inland waterway transport. The seller bears cost and risk until the goods are on board the vessel at the port of shipment. Note that under FOB the seller clears for export, but the buyer arranges and pays for the main freight and insurance.
CIF — Cost, Insurance and Freight. The seller pays freight to the destination port and insures the goods. Risk still passes when the goods are on board at origin — which surprises people who assume CIF means the seller carries risk all the way. It does not.
DAP — Delivered at Place. The seller delivers goods ready for unloading at the named destination, carrying cost and risk to that point. Import clearance and duties are the buyer’s responsibility.
DDP — Delivered Duty Paid. The seller bears everything including import clearance, duties, and taxes. The most seller-favourable-to-the-buyer term, and correspondingly the one that requires the seller to be genuinely able to act as importer in that country.
The four clauses that decide more than the Incoterm does
Title and risk transfer. State separately when title passes and when risk passes. For many buyers and sellers these differ, and the gap between them is where the exposure sits.
Payment terms. Letter of credit, cash against documents, open account, or a deposit balance. State the amount, currency, milestones, and what happens if a payment is delayed or a bank fails.
Inspection and acceptance. How will the buyer inspect goods, over what period, and what happens if they reject them? A contract without a defined inspection window creates arguments about whether acceptance was implied by delay.
Dispute resolution and governing law. Which law applies, which forum hears disputes, and whether disputes go to arbitration. For a China-to-Europe supply relationship, specifying a recognised arbitral institution is often more useful than a national court clause.
Compliance clauses worth getting right
Sanctions and export control clauses are now standard rather than optional. They typically require each party to warrant that it is not a sanctioned party, that the goods are not controlled, and that it will not ship to a prohibited destination. Note that these obligations sit independently of the Incoterm — being the importer does not transfer responsibility for sanctions compliance.
Also confirm the paper trail: commercial invoice, packing list, bill of lading or air waybill, certificate of origin, and any product-specific certificates. Cross-border deals fail at the border far more often than in negotiation.
Before you sign
- Confirm the exact Incoterm and the version — Incoterms 2020 differs from Incoterms 2010 in places, and the year should be stated.
- State the named place precisely. “FOB Shanghai” and “FOB Ningbo” are different contracts.
- Separate title transfer from risk transfer.
- Confirm the payment method and currency, and whether conversion risk sits with you.
- Confirm who handles export and import clearance under the chosen term.
- Agree the inspection window and the rejection process.
- Specify governing law and dispute resolution.
Frequently asked questions
Does Incoterm 2020 apply automatically? Only if the contract specifies it. Incoterms are not incorporated automatically by law — a contract that says “FOB” without a version is ambiguous.
Who arranges insurance under CIF? The seller, to a minimum cover. Under most other terms, insurance is the buyer’s responsibility.
Can I change the Incoterm after signing? You can agree an amendment, but make it in writing and signed by both parties. Informal variations to Incoterms are difficult to prove.
Which Incoterm suits a first-time cross-border seller? This depends entirely on your logistics and cash flow, not on preference. EXW places the most on the buyer; DDP places the most on the seller.
Start from a template
An Incoterms-ready international sales contract template is available free in the ABSign template library. Once agreed, both parties can sign on iPhone and iPad or in any browser, with a timestamped audit trail and no courier involved.
General information, not legal advice. Incoterms are complex and errors are expensive — have your specific agreement reviewed by a lawyer or trade adviser in the relevant jurisdictions.
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