Cost and Freight (CFR) is a trade term dictated by the International Chamber of Commerce’s (ICC) Incoterms. Under a CFR agreement, the seller is responsible for arranging sea transportation and delivering the necessary documents for the buyer to retrieve the goods upon their arrival at the destination port.
Definition and Essentials
Cost and Freight (CFR) stipulates that the seller must cover the costs and freight necessary to bring goods to a port of destination. However, the risk of loss or damage is transferred to the buyer once the goods are loaded onto the shipping vessel.
Key Elements:
- Delivery Point: Risk transition occurs at the port of shipment.
- Seller’s Obligations: Arranging and paying for transportation to the destination port.
- Buyer’s Obligations: Covering insurance, unloading costs, and liability from the point goods are on board the ship.
Types of Transactions and Uses
CFR is typically used for bulk commodities and large shipments where sea freight is the most viable transportation method. It is particularly common in industries like agriculture, mining, and heavy machinery.
Historical Context and Current Relevance
The concept of CFR has evolved with global trade’s complexity, with standardized rules being established in the early 20th century. The latest updates were made in the Incoterms 2020 by the ICC to better reflect contemporary trade practices.
Applicability and Examples
Example Scenario:
- Seller: Based in Shanghai, China.
- Buyer: Based in Hamburg, Germany.
- Goods: 10,000 metric tons of steel.
- Transport: Sea freight with the Incoterm CFR Hamburg port.
Comparisons with Related Terms
- Free on Board (FOB): The seller fulfills their obligation when the goods pass the ship’s rail at the port of shipment.
- Cost, Insurance, and Freight (CIF): Similar to CFR but the seller also covers insurance.
Frequently Asked Questions (FAQs)
Q1: What is the main difference between CFR and FOB? A1: Under CFR, the seller pays for freight transportation to the destination port, while under FOB, the buyer assumes responsibility for freight costs.
Q2: Who bears the cost of insurance under CFR? A2: The buyer is responsible for arranging and paying for insurance since the risk transfers to the buyer once the goods are loaded onto the ship.
References
- International Chamber of Commerce (ICC): Incoterms 2020
- International Trade Centre
- Shipping and Logistics Textbooks
Summary
Cost and Freight (CFR) terms are crucial for ensuring clarity in international sea freight contracts. By obligating the seller to handle transportation and documentation up to the destination port while transferring risk to the buyer upon loading, CFR balances responsibilities between both parties.
Understanding CFR in-depth aids businesses in strategizing their logistics and cost management effectively.
