What is CFR?
CFR terms require the seller to arrange and pay for sea freight to the buyer’s indicated location. It also demands the seller to provide any necessary documentation the buyer will need to accept the goods from the carrier.
Once the vessel docks at the destination, liability rolls over to the buyer. The buyer is charged with unloading costs, import fees, duties, and any additional transportation expenses.
What is CIF?
Similar to CFR, CIF requires the seller to arrange sea freight but also necessitates the purchase of marine insurance to protect the order. The minimum agreed-upon insurance, any extra shipping costs, and mandatory documents are all handled and paid for by the seller.
CIF – Cost, Insurance, and Freight
Starting with CIF, it stands for Cost, Insurance, and Freight. In essence, it covers three factors; freight cost, risk transfer, and insurance.
1. Freight cost
Under CIF, freight costs are the seller’s obligation. Namely, the seller must arrange to deliver the goods to the destination port named in the contract, and pay the related costs.
2. Risk transfer
However, any potential risk is transferred from seller to buyer early during the shipment process; namely, when the goods are on board the shipping vessel. Such risks include the risks of damage or loss of the shipment.
3. Insurance
In terms of insurance, the seller is also obliged to pay for insurance cover. It is noteworthy, however, that said insurance is defined as the ICC’s tax payment amount, which is the minimum coverage.
Thus, if the buyer wishes to have more insurance protection, be it due to cargo value or other reasons, it will need to be arranged outside of basic CIF coverage. Namely, it will either need to be expressly agreed to with the seller in the transaction contract, or the buyer will need to make their own additional insurance arrangements.
Thus, to consolidate the CIF template;
The seller’s costs end at the export port and include export customs, freight, and insurance costs.
The buyer’s costs begin at the destination port and include import customs and transportation to their warehouse or other desired destination.
The transfer of risk occurs once the goods are on board the export ship.
Any additional insurance or other arrangements must be expressly agreed to in advance.
CFR – Cost and Freight
CFR, then, stands for Cost and Freight. Just like CIF, in essence, it also covers three factors; freight cost, risk, and insurance.
1. Freight cost
Freight cost remains the seller’s responsibility under CFR. Thus, the seller is obliged to arrange for and pay the costs and freight of goods to the destination port named in the contract.
2. Risk transfer
Also similarly to CIF, risks are also transferred from seller to buyer early – specifically, once the goods pass the rail of the shipping company’s vessel in the port of shipment. Such risks include the risks of loss, damage, or destruction of goods.
3. Insurance
However, while the two share the similarity of freight cost and risk transfer point, CFR differs from CIF in terms of the insurance. Under CFR, marine insurance is not among the seller’s obligations.
The seller is not liable for damages after the goods have been loaded on the export ship, and insurance costs affect the buyer’s inventory costs instead. Therefore, insurance will be the primary factor to consider when contemplating if CIF or CFR is better or preferable for either party.
