CFR (Cost and Freight) is the Incoterms 2020 rule under which the seller loads the goods on board the vessel at the port of shipment and pays the freight to the port of destination. Risk passes to the buyer as soon as the goods are loaded on board; costs, however, remain with the seller up to the port of destination. The seller has no obligation to insure, and the rule is used only for sea and inland waterway transport.
Why do costs and risk end at different points under CFR?
As with the other "C" rules, under CFR the points where costs and risk end are separate. The seller organises the carriage and pays the freight to the port of destination, but the risk during carriage lies with the buyer. The seller fulfils its delivery obligation as soon as the goods are placed on board the vessel at the port of shipment. If the ship sinks on the way, the seller is still entitled to the price of the goods, and the buyer covers the loss from its own insurance.
| Item | Port of shipment | Sea voyage | Port of destination |
|---|---|---|---|
| Risk | Seller until loaded on board | Buyer | Buyer |
| Freight | Seller | Seller | Seller (items in the contract of carriage) |
| Insurance | No obligation | Buyer's choice | Buyer's choice |
| Customs | Export: seller | – | Import: buyer |
| Unloading | – | – | Seller if included in the contract of carriage, otherwise buyer |
What does each party take on?
- Seller: Export customs clearance, carriage to the port of shipment, loading on board, freight to the port of destination, delivering the transport document (usually a bill of lading) to the buyer, notice of shipment.
- Buyer: All risk after loading, insurance, destination costs not included in the contract of carriage, import customs clearance and duties, carriage beyond the port.
It is important for the seller to give the buyer notice of shipment; the buyer starts its insurance on the basis of this notice. If no notice is given, the consequences of the uninsured period may fall back on the seller.
What is the difference between CFR and CIF?
The only difference is insurance. Under CIF, the seller must take out a policy in the buyer's favour with at least ICC (C) cover for 110% of the contract value. Under CFR there is no such obligation. Importers choose CFR when they want to use their own annual policy, obtain broader cover or work with an insurer in their own country. Who is responsible for insurance under each rule is shown in insurance under Incoterms.
Which cargo is it suitable for, and which not?
According to the ICC's explanatory notes, CFR suits bulk and non-containerised cargo where the seller has direct access to the vessel; grain, coal, steel, fertiliser and project cargo are typical examples. With container cargo, the goods are usually handed over at the terminal days in advance; from then until loading on board, the seller bears a risk it cannot control. In that case CPT, where risk passes on delivery at the terminal, is more appropriate; the comparison is in the difference between CFR and CPT.
How is it written in the contract?
The port of destination is written after CFR: "CFR Novorossiysk, Incoterms® 2020". Since risk passes at the port of shipment, it is in the buyer's interest to specify the port of shipment in the contract as well. Otherwise the seller may load at any port that suits it. If a specific terminal or berth is required at the port of destination, it should also be stated; the seller arranges the contract of carriage accordingly.
In letter-of-credit sales, the latest shipment date, the "freight prepaid" notation required on the bill of lading and whether transhipment is allowed must appear identically in the proforma and the letter of credit text. Discrepancies in these three details are among the most frequent reasons for reservations on bank payment.
Common mistakes
- Using CFR for container cargo out of habit.
- The buyer assuming that because "freight is on the seller", the risk also stays with the seller, and not taking out insurance.
- Not discussing who bears items such as THC, storage and demurrage at the port of destination; details are in freight surcharges.
How does Voltim Global support this?
For an exporter selling CFR, sea freight, export customs clearance and notice of shipment are planned on the same timeline. For an importer buying CFR, the cost items at the port of destination are separated out at the contract stage.