Cost and Freight (CFR) in International Trade

Cost and Freight (CFR), formerly known as Cost and Freight, is an Incoterm (International Commercial Term) that defines the responsibilities of the seller and buyer in international trade transactions. It outlines who pays for what aspects of shipping and transportation, as well as the point at which responsibility for the goods shifts from the seller to the buyer.

Understanding the Seller’s Obligations

Under CFR, the seller is responsible for:

• Cost of Goods: Obviously, the seller is responsible for the cost of the goods being sold.
• Transportation to Port of Shipment: The seller must arrange and pay for transporting the goods from their factory or warehouse to the agreed-upon port of shipment.
• Export Clearance: The seller is responsible for obtaining all necessary export licenses and completing all export customs formalities.
• Loading onto the Vessel: The seller pays for the loading of the goods onto the vessel at the port of shipment.
• Freight to Port of Destination: Crucially, the seller arranges and pays for the freight (sea transport) of the goods to the agreed-upon port of destination.

Understanding the Buyer’s Obligations

The buyer’s obligations under CFR are significant and commence at the port of shipment:

• Risk of Loss or Damage: The risk of loss or damage to the goods transfers from the seller to the buyer once the goods are loaded onto the vessel at the port of shipment. Even though the seller is paying for the freight to the port of destination, the buyer bears the risk during that voyage.
• Insurance: It is the buyer’s responsibility to arrange and pay for insurance to cover the goods during the sea voyage. The seller is not obligated to provide insurance under CFR.
• Import Clearance: The buyer is responsible for all import clearance procedures, including obtaining import licenses, paying import duties and taxes, and completing all import customs formalities.
• Unloading from the Vessel: The buyer pays for the unloading of the goods from the vessel at the port of destination.
• Transportation from Port of Destination: The buyer is responsible for arranging and paying for the transportation of the goods from the port of destination to their final destination.

Key Considerations and Implications

• Risk Transfer: The critical distinction in CFR is that the risk of loss or damage shifts to the buyer when the goods are loaded onto the vessel, even though the seller is still responsible for paying the freight. This highlights the importance of the buyer securing adequate insurance coverage.
• Insurance Requirement: While not a requirement under CFR, it is *highly recommended* that the buyer obtain insurance to protect themselves against potential losses during the voyage.
• Suitable for Sea Transport: CFR is only applicable for sea or inland waterway transport. If other modes of transport are used, other Incoterms, such as Carriage Paid To (CPT), are more appropriate.
• Negotiation: As with all Incoterms, the specific port of destination should be clearly defined in the sales contract to avoid any ambiguity.
• Seller Expertise: CFR can be beneficial for buyers who lack experience in international shipping, as the seller handles the initial shipping arrangements and freight costs.

In conclusion, CFR is a common and important Incoterm that defines the responsibilities between buyers and sellers in international trade. It’s crucial for both parties to understand their obligations, especially regarding risk transfer and insurance, to ensure a smooth and successful transaction.