In a world where global trade is accelerating and supply chains are intertwined across dozens of countries, ports, companies, and carriers, international contracts have become more complex than ever before. The challenge is no longer limited to concluding a successful deal, but to ensuring that goods arrive on time, in good condition, and under clearly agreed legal responsibilities — without disputes. Amid this complexity, Incoterms® 2020 emerge as a decisive tool that companies rely on to protect their operations, define each party’s obligations with precision, prevent misunderstandings between seller and buyer, and reduce risks related to shipping, insurance, and customs. Incoterms® operate as a “common language” of international trade, removing ambiguity and providing a clear framework for the allocation of responsibilities between the parties. This article provides a detailed yet accessible explanation of the rules, together with practical legal analysis that helps companies choose the appropriate term and avoid costly mistakes in international contracts.

Why Are Incoterms® the Safety Language of International Contracts for Companies?

Incoterms® — short for International Commercial Terms — are the most widely used framework for structuring cross-border sale relationships between companies. Issued by the International Chamber of Commerce (ICC), they provide a unified structure that clearly defines each party’s responsibilities under an international sale of goods contract. Through Incoterms®, both seller and buyer know precisely:

• who bears the various costs of transport, from loading and inland haulage, through main carriage, to unloading, port charges, handling fees, and storage;
• who is responsible for purchasing insurance and what level of cover is required;
• when risk passes from one party to the other — at the factory, at the port, upon loading on board, upon arrival, or after unloading;
• who is responsible for export and import customs clearance; and
• who issues core trade documents such as the bill of lading, certificate of origin, commercial invoices, insurance documents, and packing lists.

With this level of precision, Incoterms® close the door to misunderstandings that typically lead to expensive disputes. They provide companies with a coherent legal–commercial language that allows cross-border operations to be carried out with confidence, clarity, and transparency, without conflict between expectations and obligations.

Why Are Incoterms® Not a Binding “Law” by Themselves?

Despite their widespread use in international trade, Incoterms® are not “law” in the traditional sense, but rather an optional contractual framework that derives its force from the parties’ agreement. These rules are not a statute issued by a particular state, nor are they imposed by any governmental authority; instead, they are trade usages and standard terms developed by the ICC to facilitate understanding between seller and buyer across borders. Accordingly, Incoterms® do not apply or become operative unless they are expressly incorporated into the international sale contract. A typical clause would read, for example: “FCA Dubai Port – Incoterms® 2020.” This short phrase gives the rule binding effect between the parties because it clearly identifies the place of delivery, allocates transport responsibilities, determines the moment at which risk passes, and clarifies who bears which costs throughout the journey of the goods from the country of origin to their final destination. Incoterms® therefore do not operate automatically; they derive their effectiveness from the contract itself. This makes the correct incorporation of the chosen term a decisive step that directly affects the fate of the shipment and the allocation of responsibilities from dispatch to arrival. https://iccwbo.org

The Scope of Incoterms®: What They Cover — and What They Do Not

Although Incoterms® play a central role in structuring international sale transactions, their scope is carefully defined. They deal primarily with the practical, logistical, and risk-allocation aspects of cross-border trade, such as:

• how costs are shared between seller and buyer;
• the point in time and place where risk passes from one party to the other;
• how and where delivery is effected; and
• which party must provide key documents such as invoices, bills of lading, and certificates of origin.

They also clarify obligations relating to insurance, carriage, handling, and export and import clearance. By contrast, Incoterms® do not extend to the core legal aspects of the contract itself. They do not regulate how or when the price is to be paid, do not govern transfer of ownership or title to the goods, and do not address issues such as defects liability or quality guarantees. Nor do they deal with force majeure, liquidated damages, penalties, limitation of liability, governing law, or the competent court or arbitral tribunal in the event of a dispute. For all these reasons, Incoterms® must always be treated as a complementary component, not a substitute for a well-drafted international contract. They only achieve their full value when embedded within a comprehensive agreement that governs all of the other legal issues lying outside the scope of the Incoterms® rules.

How Are Incoterms® Classified? Multimodal vs Maritime Rules

The Incoterms® 2020 rules are divided into two main groups that reflect the nature of international transport and its different modes.

1. Multimodal Terms (Usable for Any Mode of Transport)

The first group comprises the rules that can be used for any mode of transport — air, road, rail, sea, or multimodal. These seven terms are: EXW, FCA, CPT, CIP, DAP, DPU, and DDP. They are characterised by a high degree of flexibility and are particularly well suited to modern containerized transport, multi-leg shipments, and integrated logistics chains. For this reason, they are the most commonly used rules in contemporary global trade.

2. Maritime-Only Terms

The second group consists of rules that are specific to sea and inland waterway transport only, namely: FAS, FOB, CFR, and CIF. These rules were originally designed for bulk and break-bulk cargo loaded directly onto the vessel without the use of containers. Consequently, they are not recommended for containerized shipments, because delivery of a container typically occurs inside the container terminal well before the container is physically loaded on board the vessel. Using these maritime terms for containers can lead to inaccuracies and disputes regarding when risk transfers and how responsibilities for handling and port operations are allocated. Understanding this classification is essential for companies seeking to select the right term for the mode of transport in question — a step that is crucial to ensuring clarity of obligations and avoiding common mistakes in international shipping.

A Practical, Simplified Explanation of Incoterms® 2020

The Incoterms® 2020 rules comprise eleven core terms, each with its own structure governing the relationship between seller and buyer in relation to delivery, risk, and cost. EXW (Ex Works) is the simplest term and places the greatest burden on the buyer. The seller’s obligation is limited to placing the goods at the buyer’s disposal at the seller’s premises — factory, warehouse, or workshop — while the buyer assumes all responsibilities thereafter, including loading, inland transport, main carriage, customs clearance, and insurance. FCA (Free Carrier) imposes a broader role on the seller, who must deliver the goods to the carrier nominated by the buyer, either at the seller’s premises or another agreed place of delivery. FCA is generally the most appropriate term for containerized cargo, as it reflects the reality that delivery usually occurs at a terminal or logistics hub. CPT (Carriage Paid To) requires the seller to bear the cost of carriage to the agreed destination, while risk passes to the buyer as soon as the goods are handed over to the first carrier. This distinction between “who pays” and “who bears the risk” is fundamental and often misunderstood. CIP (Carriage and Insurance Paid To) is structurally similar to CPT, but with an important additional obligation: the seller must procure cargo insurance in favour of the buyer on an “all risks” basis (Institute Cargo Clauses (A)), which is the highest standard of cover commonly used in international trade. DAP (Delivered At Place) requires the seller to deliver the goods ready for unloading at the agreed place in the buyer’s country, bearing all risks and costs up to that point. DPU (Delivered at Place Unloaded) — a key innovation in Incoterms® 2020 — goes further: the seller must not only deliver to the agreed place, but also unload the goods, thereby taking on additional operational and risk burdens. DDP (Delivered Duty Paid) represents the maximum level of obligation on the seller, who is responsible for arranging and paying for all transportation, insurance, export and import clearance, duties, and taxes, until the goods are placed at the buyer’s disposal ready for use. FAS (Free Alongside Ship) requires the seller to place the goods alongside the vessel at the named port, at which point risk transfers to the buyer. FOB (Free On Board), one of the most familiar trade terms, provides that risk passes when the goods are actually loaded on board the vessel, making the lifting operation from quay to ship the legally critical moment. CFR (Cost and Freight) obliges the seller to pay the cost of freight to the port of destination, while risk, as under FOB, transfers at the moment of loading. CIF (Cost, Insurance and Freight) mirrors CFR but adds an obligation on the seller to obtain minimum marine insurance under the Institute Cargo Clauses (C). This distinction is significant when compared with CIP, which requires the broader Clause A cover. Taken together, these terms are more than mere abbreviations; they are operational legal tools that enable companies to design clear contracts, allocate responsibilities precisely, and avoid disputes that frequently arise from misunderstanding the nature and effect of each term.

The Core Difference Between CIF and CIP

Marine insurance is one of the most critical elements in international sale contracts, and its importance is clearly reflected in the distinction between CIF and CIP under Incoterms® 2020. Despite the apparent similarity between the two terms — in both, the seller pays the cost of carriage and insurance to the agreed point — the decisive difference lies in the level of insurance cover required. Under CIF (Cost, Insurance and Freight), the seller is only required to obtain minimum insurance in accordance with the Institute Cargo Clauses (C). This covers major risks such as fire, sinking, capsizing, or collision, but does not generally cover partial loss, damage arising from handling, or many of the more frequent operational incidents. In contrast, CIP (Carriage and Insurance Paid To) imposes a stricter obligation on the seller: the insurance must comply with the Institute Cargo Clauses (A), which provide “all risks” cover, including most types of partial loss and damage during inland transport, handling at ports, and intermediate storage. For modern companies, this difference is far from theoretical. Choosing CIP instead of CIF can mean the difference between recovering the full value of a damaged shipment and facing a significant uninsured loss. In this sense, the choice between CIF and CIP may well decide the financial outcome of a transaction if something goes wrong.

The Golden Structure of Incoterms®: How Obligations Are Allocated

Incoterms® are built on a carefully engineered structure that gives them both strength and clarity in practical application. Each rule is divided into ten seller obligations (A1–A10) and ten corresponding buyer obligations (B1–B10). This mirrored system covers the entire lifecycle of the transaction from contract to delivery. On the seller’s side, the obligations include preparing the goods for delivery, determining the place and time of delivery, bearing the risk up to the agreed point, providing the required documents, arranging packing and marking, bearing the relevant transport and port costs, and issuing timely notices and instructions related to shipment and logistics. On the buyer’s side, the parallel obligations include taking delivery of the goods in the agreed manner and at the agreed time, arranging carriage where applicable, obtaining insurance when this falls within the buyer’s responsibilities, clearing the goods for import, bearing the corresponding costs, and issuing notifications necessary to coordinate the different stages of transport. This balanced allocation and mirroring of obligations make the Incoterms® rules straightforward to apply and significantly reduce the risk of misunderstanding or overlapping responsibilities — problems that have historically been a major source of international trade disputes.

Deadly Mistakes Companies Make When Using Incoterms® — And How to Avoid Them

Despite the apparent simplicity of Incoterms®, many commercial disputes arise from improper use or from choosing terms that do not match the nature of the cargo, the transport mode, or the legal and customs environment of the countries involved.

• Using FOB for container shipments, even though delivery for containers usually occurs within the terminal before loading on board.
• Agreeing to DDP without having a legal presence or tax registration in the buyer’s country, which can make import clearance impossible in practice.
• Failing to specify the place of delivery precisely, such as using “FCA Dubai” instead of “FCA Dubai – Jebel Ali Terminal 2”.
• Choosing CIP without considering the cost of the required all-risksClause A insurance for low-value or low-risk goods.

Avoiding such mistakes requires a clear understanding of each term, the relationship between cost and risk, and the operational realities of the supply chain — all of which are essential to securing a stable international contract free from unpleasant surprises.

El-Awdn’s Vision for Drafting International Contracts

El-Awdn Law Firm & Legal Consultancy adopts a sophisticated legal approach that integrates deep expertise in international trade with extensive practical experience in maritime law, air transport regulations, trade finance, and cross-border compliance. We do not view international contracts as mere documents to be signed; rather, we approach them as strategic legal frameworks designed to protect logistics operations and safeguard the entire trade cycle from origin to final destination.

Accordingly, we draft, review, and restructure cross-border shipping, supply, and distribution agreements in line with the highest international standards, while conducting rigorous assessments of the selected Incoterms® 2020 rules and their impact on risk allocation, liability exposure, and commercial performance.

Our team also brings advanced experience in preparing contracts that comply with UCP 600 governing letters of credit, handling maritime and air transport disputes before national courts and leading regional and international arbitration centres, and reviewing marine insurance policies, bills of lading, and multimodal transport documentation to ensure full compliance with applicable legal and regulatory frameworks.

At the core of our philosophy lies a fundamental principle: an international contract is not merely a commercial agreement — it is the first line of defence for the entire supply chain.
For this reason, we provide our clients with proactive, strategically focused legal solutions that reduce operational risk, strengthen their negotiating position, and ensure that their international operations remain protected, compliant, and resilient amid global legal and commercial complexity.