The result of international business activities largely depends on how the conditions in the relations between business partners are formulated.
One of the main instruments regulating relations in this area is the set of rules and trade terms called Incoterms (International commerce terms).
They were first proposed and approved by the International Chamber of Commerce in 1936.
Since then, different editions of Incoterms were introduced, and now we are using the 2010th edition of it.
Incoterms terms are recognized not only by commercial and industrial structures but also by government and legal bodies worldwide.
In this article, we’ll speak of CFR Incoterms – one such set of rules that has certain obligations and rightы for both parties of the trade contract.
What does CFR shipping mean?
CFR stands for Cost and Freight.
According to this set of rules, the seller completes the delivery when the goods pass the ship’s rail at the port of shipment.
As you may already assume, CFR Incoterms can be used only when we are talking about maritime transportation.
Under the CFR Incoterms 2010, the seller has the obligation to pay the costs and freight necessary to deliver the goods to the specified port of destination.
Naturally, this is not the only responsibility of the seller.
What are the obligations of the seller under CFR shipping terms?
# 1. Delivery of goods under the agreement
The seller has to provide the buyer with the goods accompanied by the commercial invoice or equivalent electronic message, as well as any other evidence of compliance that may be required under the terms of the agreement.
# 2. Licenses, certificates, and other formalities
The seller is obliged to obtain any export license or another official certificate, as well as to fulfill, if necessary, all customs formalities required for exporting of goods.
# 3. Transportation agreements
The seller is obliged to conclude a contract for the carriage of goods to the named port of destination by the usual and most appropriate shipping route.
All expenses, connected with this process are paid by the seller as well.
# 4. Delivery of goods
The seller must ship the goods on board of the vessel at the port of shipment on a specified date or within the agreed time.
# 5. Risk obligations
The seller must bear all risks of loss or damage to the goods until the goods cross the ship’s rail at the port of shipment.
# 5. Costs associated with the delivery of goods
The seller is obliged to bear all costs associated with the goods until they are delivered on board the ship.
Also, the seller has to pay the freight, including expenses for loading goods on board of the vessel and any costs for unloading goods at the agreed port of discharge.
Finally, he has to pay all costs associated with the implementation of customs formalities, as well as other duties, taxes and other fees payable during the export of goods.
Note: if the transit of goods takes place in the third countries territory, the seller has to pay such costs as well.
# 6. Buyer’s notification
The seller must notify the buyer that the goods have been delivered on board a certain vessel.
Also, he has to send the buyer any other notice required for him to take the necessary measures to receive the goods.
# 7. Documentation procedures
The seller must immediately provide the buyer with the usual transport document issued for the agreed port of destination.
This document (e.g., a negotiable bill of lading, non-negotiable sea waybill, proof of transportation by inland waterway transport) should:
- apply to the sold goods;
- be dated within the time agreed for the shipment of goods;
- enable the buyer to receive goods from the carrier at the port of destination
Unless otherwise agreed, such documents also might be needed for the buyer to sell the goods to a third party during transit by way of a transfer inscription (negotiable bill of lading) or by notifying the carrier.
If several originals of the transport document are issued, the buyer must be given a complete set of originals.
If the seller and the buyer agree to use electronic communications, the documents mentioned above may be replaced by equivalent electronic messages.
# 8. Checking, packing, and labeling
The seller must bear the costs associated with checking the goods (for example, checking the quality, size, weight, quantity) necessary for the delivery.
The seller is obliged to provide packaging at his own expense (unless it is customary in the given trade industry to send the goods without packaging), necessary for the transportation of goods organized by him.
Packaging must be properly labeled.
# 9. Other obligations
The seller must render full assistance in receiving any documents which may be required by the buyer to import the goods or, if necessary, for its transit transportation through third countries.
The seller must provide the buyer at his request with all the information necessary for obtaining an insurance policy.
What are the obligations of the buyer under CFR shipping terms?
#1. Payment obligation
The buyer must pay the price of the goods stipulated by the contract of sale.
# 2. Obligations connected with licenses and certificates
The buyer is obliged at his own expense and his own risk to obtain an import license or another official certificate, as well as to fulfill all customs formalities required for importing the goods and for their transit transportation through third countries.
# 3. Transport and insurance obligations
The buyer has no obligations in the case of a contract of carriage.
Because CFR shipping terms don’t have a word about the insurance contract, there is no buyer’s obligation on such matters as well.
So, if you want to buy insurance, you have to do it separately through some insurance agents and brokers.
# 4. Acceptance of delivery
The buyer must accept the delivery of the goods (i.e., receive the goods from the carrier at the named port of destination).
# 5. Risk obligations
The buyer must bear all risks of loss or damage to the goods from the moment the goods cross the ship’s rail at the port of shipment.
The main condition for this rule, however, is the proper conformity of the goods to the contract.
This means that the product must be properly identified, that is, clearly isolated or otherwise designated as the product that is the subject of this contract.
# 6. Allocation of costs
The buyer is obliged to bear all costs from the time of goods delivery on board of the vessel.
Bear in mind that this rule doesn’t imply that the buyer has to pay for the freight itself (which is a seller’s obligation as we said earlier).
In practice, it means that the buyer has to bear with fees and costs which arise at the port of destination.
For example, this is the import customs fees, costs of unloading of your goods (which is mainly the seller’s obligation, but not in all cases).
The main condition, just like for the previous rule, is the proper conformity of the goods to the contract.
# 7. Seller’s notification
If the buyer has the right to determine the period during which the goods should be shipped, and/or the port of destination, he is obliged to properly notify the seller about this.
# 8. Inspection of products
The buyer must bear the costs of any pre-shipment inspection of the goods unless the inspection is required by the authorities of the country of export.
In the latter case, the seller would be obliged to conduct and pay for the inspection.
What are the main differences between CFR and CIP Incoterms?
As you may know, CIP is another set of Incoterms, which is deciphered as Carriage and Insurance Paid to.
CIP states that the seller has to transfer the goods released in the customs regime of export to the carrier named by him.
Also, the supplier has to obtain minimal insurance for the products.
CIP is quite similar to CFR shipping terms, with the differences connected with insurance policy and transportation modes (in the case of CIP, all transportation methods can be used).
What is the difference between CFR and FOB Incoterms?
FOB stands for Free On Board.
The primary difference between using cost and freight (CFR) and free on board (FOB) shipping lies in who must pay for various freight costs.
The terms refer to the point at which transfer of responsibility for goods shipped occurs, from the seller/shipper to the buyer/receiver.
Free on Board means the seller is responsible for the product only until it is loaded on board a shipping a vessel, at which point the buyer is responsible.
With CFR, the seller must arrange and pay all costs to ship the product to a destination port, at which point the buyer becomes responsible.
How to differ CFR and CIF Incoterms?
The difference between these two Incoterms is that under the CIF term, the seller has to ensure the goods, whereas under the CFR Incoterm parties don’t have such a responsibility.
CFR is used when a buyer prefers to rely on its own insurance company, rather than the sellers.
What if the difference between CFR and CNF shipping?
CNF also stands for Cost and Freight, so it is just another name of CFR shipping terms.
Sometimes CNF can be deciphered as Cost, No insurance and Freight (that is where the “N” letter arises).
Sometimes you can also see the following way of writing this name – C&F.
How to differ CFR and CPT shipping terms?
CPT stands for Carriage Paid To.
Per these Incoterms, the seller fulfills its obligation to deliver when it hands over the goods to the carrier at the agreed point of delivery.
CPT can be used when delivery is not intended to be made directly to a vessel.
So, the supplier packs and labels your goods and deliver them to the place where they can be transferred to the carrier.
What is the difference between CFR and FCA Incoterms?
FCA is short for Free Carrier.
This Incoterms contract states that the seller completes the delivery when he places goods into the custody of the selected carrier.
If there are several carriers, the seller completes the delivery when he transfers products to the first carrier.
So, the only difference here lies in the place where the supplier gives goods to some shippers.
When we are talking about the CFR shipping, the supplier has to place your products on board a certain vessel.
FCA Incoterms implies that the seller has to deliver your goods to the carrier and load them on his transport.
In some cases, such carriers can even pick products from the seller’s warehouse on his own.
Also, the FCA set of terms can be used regardless of the transportation method.
CFR vs EXW: what Incoterms are more beneficial for the buyer?
EXW (Ex-Works) is the comfiest contract for the seller because in this instance he has to do literally nothing.
When you use Ex-Works as a buyer, you have to pick up the goods from the seller’s warehouse and load them on the transport of the carrier.
You decide who’ll be the carrier on your own, and pay all the costs connected with each stage of delivery (i.e., loading/unloading fees, freight costs, import/export customs clearance fees, etc.)
Despite all the hassle, the EXW contract can cost you much lesser than other Incoterms agreements.
Can I use CFR shipping terms for domestic shipping?
Yes, all types of Incoterms can be used for domestic shipments.
However, in the case of CFR rules, the only exception is countries that don’t have a waterway connection inside their borders.
Do CFR shipping terms include the insurance option?
As it was said previously, CFR shipping terms don’t oblige parties to purchase insurance.
So, if you want to secure your goods, you have either to buy insurance separately or use other Incoterms (CIF for example).
How are risks transfer between parties signed under the CFR contract?
We’ve already discussed the basic rules of risk transfer in the CFR contract.
Let’s make it even more clear:
- Until the goods don’t get across the vessel’s rails, all risks of loss or damage to the products would be on the supplier’s side.
- When the products are passed on board, technically, all risks are transferred from the seller. However, it doesn’t mean that the buyer has to bear risks – when your goods are in transit, the carrier is the party obliged to keep them safe.
- Only when the buyer gets his goods in his country, he starts bear with all risks of loss or damage to goods. Remember, that such products have to be in proper shape while being transferred to the buyer.
So, what should you do if you get damaged goods in your country eventually?
First of all, you have to immediately contact your seller and notice him about such a situation.
Because under CFR Incoterms the supplier is obliged to obtain the contract of carriage, he is the party who can require compensation from the carrier.
All you need to do is to provide some kind of evidence to your seller (e.g., photos, inspection results, etc.)
Who clears import/export customs under CFR shipping terms?
Under the CFR shipping terms, export customs clearance is conducted by the supplier.
He has to place already cleared goods on board of the vessel.
When it comes to export customs clearance, the buyer is the party in charge, so if you don’t have an experience with such procedures, it is better to pick other Incoterms.
Also, if there is a transit through third countries involved, all customs processes would lie on the buyer’s shoulders.
What kind of transport can be used in the case of CFR shipping terms?
CFR Incoterms are applicable only in the case of maritime transport.
What is the legal status of CFR Incoterms?
As we said previously, International Commercial Terms were published by the International Chamber of Commerce (ICC).
They are internationally recognized standards and are used worldwide in international and domestic contracts for the sale of goods.
Despite such recognition, the use of Incoterms is not obligatory.
So, if you and your supplier decide to make business on your own unique terms, it is totally legal.
However, if some party fails to complete its duties per the Incoterms agreement, another party can pursue the failed one in the court.
