Key Legal Considerations When Choosing Incoterms® Rules in International Sale of Goods Contracts

May 26, 2026

When exporting goods overseas, selecting the appropriate Incoterms® Rule is a key legal decision that shapes the allocation of risk, responsibilities, and compliance obligations between the parties. Choosing the wrong term can leave exporters exposed to uninsured losses, regulatory breaches, or contractual gaps. Ensuring the Incoterms® align with the parties’ intentions and capabilities is therefore essential to a legally robust international sale of goods contract. This article looks at some of the key areas businesses should consider when entering an international sale of goods contract, making sure the selected Incoterms® align with the legal, operational, and risk requirements of the transaction.

What are Incoterms® Rules in International Trade?

Incoterms® Rules are contractual terms commonly incorporated into a sale of goods contract when trading internationally that have the purpose of governing certain operational aspects of the contract. Depending on the terms the contracting parties choose, the Incoterms® will govern key responsibilities apportioning them between the seller and buyer in a standardised way. Although the Incoterms® Rules look deceptively similar, depending on the term selected, their operation and legal implications on the parties are significant.

Therefore, it is crucial for the correct Rule to be selected in accordance with the parties’ goods, transport mode and intentions in relation to passing of title, insurance, regulatory and documentary obligations.

Transfer of risk under Incoterms® Rules

A key area of importance when picking the most suitable Incoterms® is determining the exact moment that risk will transfer from the seller to the buyer. This point is defined within each of the different Incoterms®.

To ensure the passing of risk aligns with both parties’ intentions, it is important that the parties select the appropriate Incoterms® Rules term.

Depending on the term chosen, risk could pass as early as the goods being at the Seller’s premises under EXW, or conversely at the buyer’s destination under DDP. Therefore, it is important that insurance obligations align with the passing of risk to protect both parties. The seller will have a financial interest in obtaining insurance up until the point that risk passes to the buyer, at which point the buyer will also want to ensure they have insurance protection to cover any loss or damage after the point risk has passed.

Transfer of Title in International Sale of Goods Contracts

Incoterms do not state when title (ownership) in goods passes.

For contracts governed by English law, under section 17 of the Sale of Goods Act 1979, title will pass when the parties intend it to pass. This default position, therefore, lacks clarity and will create issues for sellers who wish to retain title in the goods being exported until payment is received. It is therefore important that appropriate title provisions are included in the wider contract terms between the parties to ensure clarity and that commercial positions are appropriately protected.

Incoterms® Insurance Requirements

Only CIF and CIP require a party (the seller) to obtain insurance cover. They require insurance of at least 110% of the contract price; however, this might fall short of a commercially sensible level of cover. Further, minimum cover policies under CIF will often not cover many common risks such as theft, damage or loss. Although a CIP contract requires the seller to have in place more comprehensive insurance in the form of ‘all-risks’ cover, this term does still not typically cover all risks, so it is important that the contract specifically caters for any particular insurance requirements.

In all other Incoterms® Rules, insurance is not mandatory, and so it is an obligation open to negotiation regarding who must obtain the cover, the level of cover and the policy coverage.

Therefore, it is important for both parties to include express wording dealing with insurance, either dealing with this entirely or supplementing the obligations under CIF and CIP, to avoid a situation where either the minimum cover obtained by the seller does not cover all losses, or where the carriage of the goods is not insured at all.

Export and import obligations

Incoterms® Rules play a central role in determining which party must obtain export licences, complete customs declarations, and satisfy regulatory formalities in both the seller’s and buyer’s jurisdictions.

For certain categories of goods, particularly dual‑use items such as chemicals, medical equipment, specialist electronics, software, or any product with potential civil and military application, export licences are legally mandatory. Selecting an Incoterms® Rule that places the duty to obtain export clearance on a party who is not legally or practically able to fulfil it can quickly lead to breach, delays, and regulatory penalties. For example, under EXW, the buyer would technically be responsible for export clearance, yet overseas buyers often cannot lawfully act as the exporter of record in the seller’s jurisdiction. In contrast, terms such as FCA or FOB place the responsibility for export formalities with the seller, which is usually more legally coherent for licensed goods.

In practice, the choice of Incoterm should reflect not only the parties’ commercial intentions but also their legal capability to perform the export and import obligations assigned. The parties should consider who can most efficiently obtain licences, maintain records of export (which may be required for tax reliefs or customs audits), and interact with domestic and foreign authorities without creating delays or regulatory exposure.

Key takeaways for businesses
  • Choose Incoterms® carefully in light of both parties’ intentions. Using default terms without analysis can create avoidable exposure to risk.
  • Align risk and insurance. Businesses should ensure that risk transfers match insurance arrangements.
  • Consider regulatory capability, not just commercial preference. The party responsible for export or import clearance must be legally able to perform those obligations; selecting a term that allocates duties incorrectly can lead to breaches and delays.
  • Integrate Incoterms® into the wider contract. Businesses should ensure that they have in place an appropriate contract that provides for terms not included in the Incoterms®, such as payment terms, title and appropriate insurance obligations.

If you would like to discuss how Incoterms® rules may impact your international trade arrangements, please contact us to speak to a specialist member of our Commercial and Regulatory team.

Mark Chapman
General Counsel, Head of Commercial & Regulatory
<script>
document.addEventListener('DOMContentLoaded', function () {
  const deptEl = document.getElementById('acf-author-department');
  const department = deptEl?.dataset?.department;

  if (typeof gtag === 'function' && department) {
    gtag('set', { author_department: department });
  }
});


  window.dataLayer = window.dataLayer || [];
  const dept = document.getElementById("author-department")?.textContent?.trim();
  if (dept) {
    window.dataLayer.push({
      event: "authorDataReady",
      author_department: dept
    });
  }

</script>
View profileContact Us

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

Latest Legal Insights