Overview: Incoterms CFR: What are Cost and Freight in delivery terms?
Hi, I’m Geoff Runcie and I’m back with the latest episode of the International Trade Series featuring incoterms CFR renowned global trade expert Murdo Beaton and Abdul Mann, creator of the cloud-based export solution EdgeCTP.
If you’re new to this series, then welcome, I hope you find it useful and that you’re sufficiently inspired to go global.
In this session, Incoterms explained, we’ll be breaking down the eleven incoterms CFR, explaining what they mean, their application, and the benefits of using them. There’ll be eleven episodes in total so make sure to subscribe to our blog if you don’t want to miss any. Alternatively, feel free to drop me an email on Support or visit www.edgectp.com.
Today we’ll be discussing incoterms CFR including how and when to use it. So Murdo what is CFR?
The Incoterm CFR stands for Cost and Freight. This term is also a sea and inland waterway transport term. For this term, the exporter is expected to bring the goods to a vessel appointed by the buyer and at a port appointed by the buyer, load the subject goods on board that vessel as in FOB. Then in addition to the FOB duties, engage with the carrier in the main contract of carriage from the port of loading to the port of destination in the destination market and secure the contract of carriage on behalf of the actual buyer.
So here we have a term where the exporter is obliged to bring the goods and load them on board the vessel. When they are loaded onboard the vessel the exporter’s risk is finished. The physical risk of the goods is now transferred over to the buyer, but having achieved that position the exporter is then obliged to enter into a contract of carriage with the carrier and secure the transport documents on behalf of the buyer then send these documents to the buyer so that the buyer can actually claim the goods at the port of destination.
So this term breaks up the relationship between the transfer of risk and the division of costs. The transfer of risk takes place at the port of dispatch but the division of cost takes place at the port of destination. So the risk and cost are affected at different points.
So very similar to Incoterms CPT I would say.
Very similar to Delivery Terms CPT as the term used for aviation transport and road transport, or a combination of those transport modes.
So you’re basically loading it onto a ship that the buyer has stipulated, at a time and place that the buyer has stipulated, and it leaves your destination market. Your responsibility is terminated as soon as your goods have touched down on the deck of that ship or vessel. However, your costs continue all the way through to the point at which it arrives in the destination market for offloading.
Absolutely correct. The importation at the destination market is not the exporter’s responsibility. That is entirely up to the buyer.
So import customs clearance is not part of the bargain.
One anomaly that exists in this term is that sometimes the carriage cost includes the unloading of the vessel at the port of destination. Now technically the Incoterm does say that for incoterms CFR the seller is not obliged to unload the cargo and be responsible for the cost of unloading the cargo at the port of destination but sometimes that figure is already included in the freight which would undoubtedly be passed onto the buyer anyway. So what some exporters do is they actually, when they enter into the contract of carriage, determine with the carrier whether the freight charge does include the discharging of the goods onto the quayside of the port of destination.
If that were to be the case then the exporter classifies the term as incoterms CFR, quay, the port of destination, which means included in your costs Mr. Buyer is the discharging of the goods at the port of destination. So of the unloading agent at the port of destination Mr. Buyer, chooses to charge you for the discharging of the vessel please reject that charge because we’ve already paid for it as part of the freight charge.
So a fairly good Incoterm to use, again because it’s adding value from the seller to the buyer in terms of it’s a little bit less stressful for the buyer to try to ascertain a vessel and do all the clearance as you would need to do.
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It’s a very common term. We haven’t mentioned the issue of insurance here but under CFR the exporter is not obliged to insure. Again the exporter would consider, well my physical risk in the goods is exactly the same as for FOB so I will consider that my insurance attitude will the same as it would be for a FOB transaction. From the buyer’s position, the buyer is responsible for the goods while they are on board the ship so on that basis the buyer would say “I’d better consider insurance from the port of shipment to the final destination.”
That’s an important point Murdo because you have a situation where the seller might go for insurance which means that as soon as it touches down on the vessel at the point of departure that’s the insurance over. If the buyer isn’t switched onto that fact and the ship sinks it’s Ummm…..
Indeed and this is a classic term to identify the reasons why both parties in the transaction if they’re using these Incoterms, must understand them. They really must understand them and they must understand the obligations of the respective parties because it is so easy for the buyer to conclude in their own mind “Oh the exporter is supplying this to me on a CFR basis. He’s paying everything up to the port of destination.” So the buyer could be excused for thinking “Well if he paying everything up to the port of destination, surely he’s going to responsible for the physical risk.”
Now unfortunately under the Incoterm interpretation, he is not. He is responsible for the cost to the port of destination but not for the physical risk. So here I think that the exporter ought to be probably concerned with developing a good relationship with the buyer and would probably say to the buyer, just in case they are unaware “I assume Mr. Buyer that you will be attending to any insurance to cover the goods whilst they are on board the ship.” This in turn, of course, leads to the question, when I said well the exporter is entering into the contract of carriage with the carrier, so the question here would be if the exporter is entering into the contract of carriage surely it is the exporter who owns these goods whilst they are on board the ship, transiting to the port of destination? So that the buyer really has no influence over these goods.
This is not the case because when the exporter secures the contract of the carriage he is given certain carriage contract documents by the carrier. He will then endorse these documents immediately over to the buyer and the buyer is now the party who holds the contract of carriage with the carrier. This should be happening before the vessel actually departs from the point of shipment so, in fact, the buyer does have authority over the goods while they are on board the ship in transit to the port of destination.
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