What Incoterms leave out of a sales contract
Incoterms settle delivery, not payment, title or disputes. How a trader closes those gaps in the contract, the shipping documents and the invoice.
By Achekam · · 4 min read · For Logistics businesses in South Africa, Nigeria, Kenya
"FOB Durban, Incoterms 2020" on a quotation feels like a complete answer. The buyer knows where the goods will be handed over, who books the main carriage and when risk moves across. Plenty of exporters in South Africa, Nigeria and Kenya stop there.
The trouble starts when the buyer pays late, or not at all, or claims the goods arrived damaged, or goes insolvent while the cargo is still at sea. At that point the trader discovers that the three letters on the quotation said nothing about any of it. Incoterms are rules about delivery. Most of what goes wrong between a seller and a buyer sits outside them.
What Incoterms do not decide
The US International Trade Administration (ITA) is explicit about the limits. It states that Incoterms do not:
- identify the goods or the contract price;
- set the method or timing of payment;
- determine when title to the goods passes; or
- address liability for non-conforming goods, delayed delivery or dispute resolution.
Each of those is a gap the sales contract has to fill. If the contract is silent, the parties are left to argue about it later, often under a law neither chose and in a court neither wanted.
Name the version you mean
Before closing the gaps, make sure the rule you did choose is unambiguous. The ITA states that parties may still agree to use an earlier version, such as Incoterms 2010, provided all parties agree and the chosen version is clearly specified, although the International Chamber of Commerce (ICC) recommends Incoterms 2020. "FOB" on its own leaves room to argue about which set of rules applies. "FOB Durban, Incoterms 2020" does not.
The ICC publishes a free Incoterms 2020 checklist and flowcharts to help sellers and buyers choose the right rule for business-to-business contracts for the sale of goods. Using it before quoting saves rewriting terms after the buyer objects. Which costs each rule puts on whom is covered in who pays what under each Incoterms rule.
Closing the gaps in the contract
A short schedule to the sales contract, agreed at the same time as the Incoterms rule, can deal with each gap in plain words:
| Gap the ITA identifies | What to write down |
|---|---|
| Goods and price | Description, quantity, unit price, currency, and whether the price includes the costs the chosen rule puts on the seller |
| Payment method and timing | Deposit, balance, due date, how payment is made, and what happens if it is late |
| Title | The moment ownership passes, for example on full payment rather than on delivery |
| Non-conforming goods | How quickly the buyer must report a defect, and the remedy: repair, replace or credit |
| Late delivery | What counts as late and any agreed consequence |
| Disputes | Governing law and the forum, whether a court or arbitration |
Keeping title until the seller is paid is worth particular thought. Risk may pass to the buyer at the port of shipment under the chosen rule while ownership stays with the seller until the money arrives. The contract must say so; the Incoterms rule will not.
Securing payment through the documents
Where trust between the parties is thin, the shipping documents and the payment mechanism can do some of the work the contract cannot.
Order bills of lading. Investopedia explains that an order bill of lading is negotiable, typically made out "to the order of" a named party, and can be endorsed to pass title during transit. That is what makes it useful in letter-of-credit transactions and as collateral in trade finance: the documents giving control of the cargo are released against payment, not before.
Letters of credit. Under a letter of credit, the buyer's bank undertakes to pay against compliant documents, which usually include the order bill. The seller's risk shifts from the buyer to the bank, at a cost.
Escrow. Investopedia gives the example of an international seller whose buyer places the payment in escrow, with instructions to release it to the seller once the goods arrive in a suitable state, so that both parties are protected. It suits buyers who will not pay upfront and sellers who will not ship on open account.
Writing the terms into the invoice and watching them
Once the contract is agreed, the invoice is where the payment terms meet the books. In Achekam, a customer invoice starts as a draft that can be changed or deleted. Issuing it takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT, so the sale and the amount owed are in the books the moment the invoice goes out. Default terms are 30 days, so check before issuing that the invoice agrees with the payment timing in the contract, and keep the signed contract where whoever chases the debt can find it.
From there, the receivables view ages what each customer owes into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. A foreign buyer drifting from one column to the next is a signal to act on the contract's late-payment clause before the next shipment, not after. Ageing shipper accounts covers how to read that list week by week.
Where the buyer can pay online, the business can create a payment link for an issued invoice, copy it or e-mail it with the invoice, and the customer pays on a public page that carries the business's name and branding. A link lasts 14 days by default, and there is none for draft or voided invoices. Whether a buyer abroad can use it depends on what your payment provider accepts; confirm that before promising it in the contract.
Before you quote the next export
The ITA's Know Your Incoterms page sets out what the rules cover and what they leave out. Take your standard quotation, add the six lines from the table above, and agree them with the buyer before the first container is booked.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
