CFR (Cost and Freight): International Trade Term Explained

August 31, 2024 4 min read International Trade Incoterms CFR Cost and Freight International Trade Shipping Terms Incoterms

CFR (Cost and Freight) is an international trade term used in shipping contracts where the seller must cover the costs and freight necessary to bring goods to a specified port of destination, but without insurance coverage included.

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CFR (Cost and Freight) is an Incoterm (International Commercial Term) commonly used in the realm of international trade. Under a CFR agreement, the seller is responsible for all costs associated with transporting goods to the destination port. However, unlike CIF (Cost, Insurance, and Freight), the seller is not required to secure insurance for the cargo. The risk of loss or damage to the goods is transferred from the seller to the buyer once the goods pass the ship’s rail at the port of shipment.

Overview of CFR Agreements

Obligations of the Seller

Under the CFR term, the seller must:

Supply and Deliver Goods: Ensure the goods conform to the contract’s specifications and are delivered to the agreed port of shipment.
Export Documentation: Obtain necessary export licenses and complete administrative export documentation.
Costs and Freight: Cover all transport costs to the port of destination and pay for any loading charges.
Notify Buyer: Provide timely notification to the buyer that the goods have been shipped.

Obligations of the Buyer

The buyer’s primary responsibilities include:

Risk After Shipment: Assume all risks for the goods once they pass the ship’s rail at the port of shipment.
Import Formalities: Handle import customs clearance, duties, and any other taxes or fees.
Further Transport: Arrange further transportation from the destination port, if required.
Insurance: Secure their own insurance if desired, as this is not covered by the seller.

Comparison with CIF

While CFR and CIF (Cost, Insurance, Freight) are similar in that both terms stipulate the seller covers costs and freight to the destination port, the key difference lies in insurance:

CIF: The seller also arranges and pays for insurance coverage for the goods.
CFR: Insurance responsibility rests on the buyer, who may choose whether to insure the shipment.

Historical Context

The term CFR was introduced as part of the Incoterms, a set of international rules established by the International Chamber of Commerce (ICC) in 1936 to standardize trading practices and clarify the allocation of costs and responsibilities between sellers and buyers in international shipping contracts.

Over the years, CFR has been one of the essential terms guiding the shipping industry, providing clarity in the distribution of costs and risks.

Applicability and Considerations

Usage Scenarios

CFR is predominantly applied in maritime and inland waterway transport. It is suitable for bulk commodities such as agricultural products, minerals, and raw materials where shipping cost management is crucial.

Buyer’s Considerations

Buyers opting for CFR should:

Ensure comprehensive insurance policies are in place to cover potential losses or damages during transit.
Be prepared to manage responsibilities and risks post loading onto the ship at the departure port.

Seller’s Considerations

Sellers must carefully document transportation costs up to the destination port and provide timely information to buyers about shipment progress.

FOB (Free On Board): Seller’s responsibility ends once goods pass the ship’s rail at the port of shipment; buyer covers subsequent costs.
CIF (Cost, Insurance, and Freight): As CFR but includes insurance cost covered by the seller.
DAP (Delivered At Place): Seller covers all costs and risks until goods are delivered at the specified location.

FAQs

Is CFR suitable for air or land transportation?

CFR is typically used for maritime and inland waterway transport. For air or land transportation, terms such as CPT (Carriage Paid To) or CIP (Carriage and Insurance Paid to) are more appropriate.

Who bears the insurance cost under CFR?

The buyer is responsible for arranging and paying for any insurance under CFR terms.

Can CFR be used for container shipments?

Yes, but it is generally more common to use terms such as FOB or FCA (Free Carrier) for containerized shipments due to different handling and loading practices.

Summary

CFR (Cost and Freight) is a crucial Incoterm in international trade that outlines the allocation of costs and responsibilities between the seller and buyer. The seller covers transportation costs up to the destination port, leaving insurance responsibilities to the buyer. This term ensures clear demarcation of roles, aiding in smooth and efficient international shipping transactions.

References

International Chamber of Commerce. “Incoterms® 2020.” ICC Publication.
Institute of Export & International Trade. “Understanding Incoterms®.” Export Guide.
Global Negotiator. “Incoterms® Rules 2020: Complete Guide.”

By understanding CFR and its implications, businesses engaged in international trade can better navigate the complexities of shipping and ensure seamless operations.