CFR-Incoterm explained: responsibilities in maritime transport

In international maritime transport, it is essential to know clearly before signing a contract who pays for the transport and who bears the risk. The CFR-Incoterm, which stands for Cost and Freight, is one of the most widely used terms of trade in maritime shipping.

The rule is part of Incoterms 2020, published by the International Chamber of Commerce (ICC), the global authority on international trade terms.

Under CFR, the seller arranges and pays for freight transportation to the named port of destination. However, the risk passes to the buyer at the time the goods are loaded aboard the vessel at the port of departure.

Many buyers and sellers are surprised by this early moment when the risk passes. Therefore, the lack of an insurance requirement under CFR makes it even more important to fully understand this rule before agreeing to these terms.

In this article, we explain what CFR means, how seller and buyer responsibilities are divided, how the two transfer points work and when CFR is the right choice for your shipment.

What is the CFR-Incoterm?

CFR stands for Cost and Freight. It is one of the 11 trade rules within Incoterms 2020, published by the International Chamber of Commerce (ICC). In the Netherlands, CFR is also known as “Cost and Freight.” It is one of four Incoterms that apply exclusively to sea and inland waterway transport.

Under the CFR-Incoterm, the seller loads the goods aboard the ship at the port of departure. The seller enters into a transportation contract and pays all freight costs to the named port of destination.

The bill of lading (bill of lading) usually states “freight prepaid” under CFR, which is important when payment is made via a Letter of Credit.

CFR is best suited for bulk and general cargo, such as grain, coal, crude oil and automobiles. It is not suitable for container shipping. Many traders make this mistake, so it is important to know this in advance.

For container transport, CPT (Carriage Paid To) is usually the more appropriate Incoterm. Always clearly state the exact named port of destination in the sales contract.

Responsibilities of seller and buyer under CFR

Under CFR, both parties have clearly defined responsibilities. The seller bears more responsibility than under FOB, but the buyer assumes the risk sooner than many people expect.

Understanding these CFR responsibilities before signing a contract helps avoid costly disputes and unexpected expenses.

The seller is responsible for everything until the goods are loaded aboard the ship at the port of departure. From then on, the buyer bears all risks of loss or damage. This applies even if the seller continues to pay for freight transportation to the port of destination.

The buyer takes full responsibility from the port of destination. This includes import customs clearance, import duties, unloading costs and transportation to the final domestic destination.

Under CFR, neither party is required to obtain insurance. However, both parties can purchase insurance for the portion of the transportation for which they bear the risk.

Transfer of risk and cost under CFR: two different times

The most important and often misunderstood feature of the CFR-Incoterm is that risk and cost do not pass at the same time.

Many traders assume that these pass at the same time. Under CFR, however, this is not the case. This difference is one of the most common causes of confusion and disputes in CFR transactions.

Risk passes at the port of departure. The moment the goods are loaded on board the ship, the buyer bears all risks of loss or damage during the entire sea voyage. This is true even while the seller continues to pay freight charges during the same voyage. Thus, the buyer bears the risk while the seller continues to bear the cost.

The charges shall pass at the port of destination. The seller pays the freight up to the said port of destination. Once the goods arrive there, the buyer pays all costs from then on.

This includes unloading costs, import customs clearance, import duties and inland transportation to the final destination.

Always specify the exact location or terminal within the agreed upon port of destination in both the contract of sale and the contract of carriage. Up to that specific point, all costs remain the responsibility of the seller.

Insurance under CFR: who is responsible?

Under CFR, neither the seller nor the buyer is required to purchase insurance. This is confirmed by ICC Incoterms 2020 and makes CFR fundamentally different from CIF, where insurance is required by the seller.

However, the buyer bears the full risk of loss or damage from the moment the goods are loaded aboard the ship. This means that the buyer bears the risk during the entire sea voyage without guaranteed insurance coverage.

Therefore, it is strongly recommended that the buyer purchase their own transportation insurance or have an annual goods transportation policy before agreeing to CFR terms.

• Vendor: Under CFR, the seller has no obligation to provide insurance. However, if you as the buyer request insurance information, the seller must provide that information at the buyer’s expense.
• Copper: The buyer is not required to insure the goods, but bears the full risk throughout the sea voyage. It is strongly recommended to have your own transport insurance or an annual policy without depending on the seller.
• Both parties: Both the seller and the buyer may insure the portion of the transportation for which they bear the risk. Any insurance arrangements must be clearly agreed and recorded prior to signing the contract of sale.

How will costs be shared among CFR?

Under CFR, the seller pays significantly more costs than under FOB. Cost sharing under CFR is linked to two main transfer points: the transfer of risk at the port of departure and the transfer of cost at the port of destination.

Both parties must clearly calculate their total costs before agreeing on CFR in a sales contract.

Cost to be borne by seller:

• Export packaging, marking and quality control of goods
• Export licenses and export customs clearance
• Pre-transport and loading costs at the port of departure
• Main cargo to the named port of destination
• Transportation-related security costs
• Charges for transport documents, including the bill of lading

Cost to be borne by the buyer:

• All costs from the time the goods are loaded aboard the vessel
• Import customs clearance and import duties in destination country
• Discharge costs at the port of destination
• Transport from port of destination to final domestic destination
• Cost of pre-shipment inspections required for import processing

CFR vs. FOB, CIF and CPT: what’s the difference?

CFR is often compared to FOB, CIF and CPT because these Incoterms have similar transportation modes or cost structures. By understanding the key differences, you can choose the right Incoterm and avoid unexpected costs and risks to your shipment.

The main difference between CFR and FOB is who pays for the main freight. Under FOB, the buyer arranges and pays for the transportation from the port of departure.

Under CFR, the seller arranges and pays for the freight all the way to the port of destination. CFR therefore gives the seller more control over the shipping arrangement and choice of carrier.

The main difference between CFR and CIF is insurance. Under CFR, no insurance is required for either party. Under CIF, at a minimum, the seller must provide insurance for the buyer according to ICC Clause C. If you want to include insurance coverage in the transaction, CIF is usually the safer choice for buyers.

If you ship goods in containers, CFR is not the right choice. CPT is the right alternative because this Incoterm works for all modes of transportation, including container shipping.

Under CPT, the risk also passes earlier, namely when the goods are transferred to the first carrier. This fits better with the way container logistics works in practice.

When should you use the CFR-Incoterm?

CFR works best when the seller has direct access to the vessel and ships non-containerized goods to a named destination port.

CFR is a good choice for bulk shipments, such as grain, coal, crude oil and commodities. Experienced exporters also prefer CFR because it gives them more control over carrier selection and simplifies documentation for a Letter of Credit.

CFR is not suitable for container freight. In that case, prefer to use CPT. If you as a buyer want full control over carrier selection, FOB is a better option.

How do you correctly state CFR in your sales contract?

Always include the agreed CFR Incoterm correctly in your sales contract to avoid disputes. Include the full name of the named destination port and the year of the Incoterms version.

Specify the exact location or terminal within the port, as the seller’s cost liability ends at that exact point.

For example, a Dutch exporter shipping to Singapore should state as follows: CFR Singapore, Tanjong Pagar Terminal, Incoterms 2020.

CFR export customs clearance you can rely on

Under CFR, the seller is responsible for all export customs clearances and export documentation. This includes export licenses, security checks and pre-shipping inspections in the country of export. If CFR export customs clearance is handled improperly, it can delay the entire shipment and cause costly problems for both parties.

Are you looking for a reliable and AEO certified customs service provider in the Netherlands? The Customs Company takes care of all your export customs obligations.

Thanks to our direct connections with Dutch Customs and Portbase, as well as our 24/7 support, your CFR customs clearance is always handled correctly and on time.