Choosing the Incoterm is half the work; drafting the contract around it is the other half. Our page on Incoterms and international sales explains how we draft and litigate these clauses.
Export guide: aligning the Incoterm and the payment method to reduce international risk
Litigation experience shows it: export disputes most often arise from an inconsistency between the Incoterm stipulated, the payment method chosen and the documents the seller is actually able to produce. An FCA without the “on board” option backed by a documentary credit requiring an on-board bill of lading, or an EXW combined with a documentary credit the seller will never be able to honour because it does not control shipment: these contractual design errors are avoidable. Here are the points of vigilance.
1. What the Incoterms settle, and what they never settle
The Incoterms® are neither an international treaty nor a uniform law: they are private contractual rules codified by the International Chamber of Commerce, binding on the parties only if incorporated into their contract. They do not settle the transfer of title, the law applicable to the contract, the competent court, the price and payment terms, or economic sanctions and export controls. Nor can an Incoterm derogate from a mandatory rule: an EXW clause does not relieve the exporting seller of compliance with export control regulations where those impose reporting obligations of its own. In addition to the chosen Incoterm, the contract must therefore expressly stipulate the applicable law and the competent court. The Incoterm settles the risk, not the judge.
2. Settled case law on the scope of the Incoterms
The Court of Justice of the European Union has characterised the Incoterms as generally recognised usages of international trade which the national court must take into account when construing a contract silent on the place of delivery (CJEU, 9 June 2011, Electrosteel Europe v Edil Centro, Case C-87/10), without however endorsing their automatic application absent an express clause. The French Cour de cassation has held that a FOB, CFR or EXW sale is a “departure sale” transferring risk upon handing over to the carrier or making available at the factory (Cass. com., 11 May 2010, No 08-21.266), that the choice of a CIF Incoterm incorporates its provisions into the contract and fixes the place of delivery at the port of shipment (Cass. com., 19 February 2013, No 11-28.846), and above all that an EXW seller who itself loaded the goods remains liable for the consequences of defective loading, the Incoterm stipulation being no bar to that liability where the seller in fact behaved as a shipper (Cass. com., 13 September 2016, No 14-23.137).
3. The eleven Incoterms® 2020 rules: choose according to control of transport
The eleven rules divide between those applicable to any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and those reserved for sea transport (FAS, FOB, CFR, CIF). The decisive criterion is not only the allocation of costs, but the seller’s ability to produce, once shipment is complete, the document the chosen payment method will require, an “on board” bill of lading for a maritime documentary credit, for instance. The payment method dictates the document, not the other way round. The ICC in fact advises against using EXW for export, preferring FCA, precisely because EXW exposes the seller to a real evidentiary risk on VAT and proof of delivery, for want of control over transport.
| Incoterm | Transfer of risk | Export clearance | Recommended payment |
|---|---|---|---|
| EXW | Made available at the factory | Buyer | Bank transfer (long-standing customers only) |
| FCA | Handed over to the nominated carrier | Seller | Documentary credit, documentary collection |
| DAP | Arrival at destination, not unloaded | Seller | Documentary credit, staged transfer |
| DDP | Arrival at destination, not unloaded | Seller (+ import) | Documentary credit, staged transfer |
| FOB | Loaded on board the vessel | Seller | Maritime documentary credit |
| CIF | Loaded on board (+ insurance) | Seller | Maritime documentary credit |
4. The documentary credit, between security and documentary rigour
Between the simple bank transfer (which exposes the seller to non-payment after shipment) and the documentary collection, which merely transmits documents without guaranteeing payment, the documentary credit (letter of credit) remains the reference instrument for securing payment from new customers or in risk countries. Governed by the ICC Uniform Customs and Practice (UCP 600), it rests on a cardinal principle: banks deal with documents, not goods (Article 5 UCP 600), and examine the compliance of the presentation on the basis of the documents alone (Article 14), with five banking days to notify a reasoned refusal (Article 16). Five days, not one more. This documentary formalism cuts both ways: it secures payment against delivery of compliant documents, but it also punishes the slightest discrepancy, hence the importance of checking beforehand that the chosen Incoterm will actually allow the required document to be produced.
5. Four classic traps to avoid
Litigation practice identifies recurring and risky combinations: an EXW backed by a documentary credit, when the seller does not control transport and cannot produce the required documents; an FCA without the “on board” option when the documentary credit requires an on-board bill of lading, leading to an almost systematic documentary rejection; a DDP entered into without the seller having the capacity to act as importer (VAT registration, customs representation) in the country of destination; and finally a simple bank transfer granted to a new customer in a risk country, which stacks commercial risk on top of political risk without any cover.
6. Securing export receivables with credit insurance
Beyond the Incoterm/payment pairing, export credit insurance completes the security of the transaction. Bpifrance Assurance Export manages, on behalf of the French State, short-term supplier credit insurance, buyer credit insurance for credits of two years or more, and the guarantee of discounting and assignment of supplier receivables, with covered shares of up to 95%, or even 100% for certain SMEs and mid-caps on specific products. The State covers, the exporter advances. On the litigation side, the Brussels I bis Regulation confers jurisdiction on the court of the contractual place of delivery, and the case law of both the CJEU and the Cour de cassation systematically favours the place stipulated in the contract over the actual physical place of delivery (Cass. com., 8 February 2023, No 21-13.536), hence the value, once again, of stipulating everything expressly.
Three typical scenarios for choosing without error
For a sale to a new customer in an emerging country, the combination of FCA or CIP (which leaves the seller in control of shipment and of the transport document) with an irrevocable and confirmed documentary credit, supplemented by short-term supplier credit insurance, covers documentary risk, bank risk and residual political risk at once. For a recurring relationship with a long-standing distributor within the European Union, an FCA or DAP paid by transfer at maturity, secured by short-term credit insurance, is generally sufficient and moreover facilitates factoring or discounting of receivables. The credit line frees up, cash flow breathes. For the sale of heavy equipment with installation at a buyer outside the Union, DAP or DPU for logistics, a documentary credit for the supply and independent performance guarantees for the services allow each stage of the transaction to be covered according to its own nature.
The complete guide, with model clause and operational checklist
The firm has prepared a legal and operational guide detailing the eleven Incoterms® 2020 rules, export payment methods, typical Incoterm/payment/credit insurance scenarios, and a model contractual clause ready to adapt. It is available as a free download in exchange for a professional email address:
Download the guide “Choosing the right Incoterm and the right payment method”
For assistance with an international trade transaction or dispute, see our page on international trade law and, on this specific topic, our page on international contracts.
Two pages of the series Exporter disputes show what happens when the chosen instrument seizes up: the bank refuses my documentary credit and my foreign buyer refuses the goods.