Cost and Freight

Cost and Freight (CFR) is an international trade term used to define the responsibilities of buyers and sellers under a contract of sale when goods are transported by sea or inland waterway. It is one of the Incoterms (International Commercial Terms) established by the International Chamber of Commerce (ICC) to standardise global trade practices. Under a CFR contract, the seller is responsible for arranging and paying for the cost of transporting goods to the destination port, while the buyer assumes responsibility for the risk of loss or damage once the goods are loaded on board the vessel at the port of shipment.

Definition and Key Concept

Under CFR, the seller covers two main components of the transaction:

1. Cost: The expense of producing, packaging, and transporting the goods to the port of destination.
2. Freight: The cost of carriage from the port of shipment to the port of destination.

However, the risk transfers from the seller to the buyer once the goods cross the ship’s rail at the port of origin. The buyer must therefore bear all risks, insurance costs, and any additional expenses incurred after that point.
CFR applies only to maritime and inland waterway transport—for other modes of transport, the appropriate Incoterm is CPT (Carriage Paid To).

Obligations of the Seller and Buyer

The responsibilities of each party under a CFR contract are clearly defined in the Incoterms rules:
Seller’s Obligations:

• Supply goods in conformity with the contract.
• Obtain all necessary export licences and clearances.
• Deliver goods on board the vessel at the port of shipment.
• Bear the cost of freight to the named port of destination.
• Provide the buyer with shipping documents, such as the bill of lading, commercial invoice, and packing list.
• Give timely notice of shipment and loading.

Buyer’s Obligations:

• Pay the agreed price for the goods.
• Bear all risks and costs once goods are loaded onto the vessel.
• Arrange and pay for marine insurance, unless otherwise agreed.
• Obtain necessary import licences and clearances at the destination port.
• Pay unloading, import duty, and inland transportation costs from the port of destination.

Point of Risk Transfer

A defining feature of CFR is the split of cost and risk between the seller and buyer:

• Cost: Remains the seller’s responsibility until the goods reach the destination port.
• Risk: Transfers from the seller to the buyer once the goods are safely loaded onto the vessel at the port of origin.

This distinction means that although the seller pays for freight, they are not responsible for damage or loss occurring during transit. Buyers must therefore obtain insurance separately to protect against potential risks during shipment.

Documentation Involved

A CFR transaction typically requires the following documentation:

• Commercial Invoice: Issued by the seller, detailing goods, quantity, and value.
• Bill of Lading (B/L): Proof that goods have been shipped and a key document for taking delivery at the destination.
• Packing List: Description of packaging details and markings.
• Certificate of Origin: Specifies the country where goods were manufactured.
• Export Licence and Customs Declaration: Ensures compliance with export regulations.

The seller must provide these documents promptly to the buyer to facilitate customs clearance and payment arrangements under the sale contract.

Example of a CFR Transaction

Suppose a seller in India agrees to export machinery to a buyer in the United Kingdom under CFR London Port.

• The seller arranges and pays for transport from their factory to the Indian port, loading, and ocean freight to London.
• Once the goods are loaded onto the ship in India, the risk passes to the UK buyer.
• If the goods are damaged at sea, the buyer must claim compensation through their own insurance.
• On arrival, the buyer pays for unloading, import duties, and inland transport to the final destination.

Thus, the seller fulfils their contractual obligations by delivering the goods on board and paying freight charges, even though ownership and risk have already transferred to the buyer.

Comparison with Related Incoterms

The key difference between CFR and CIF lies in insurance: under CIF, the seller must also procure insurance coverage for the goods during transit, while under CFR, insurance is the buyer’s responsibility.

Advantages and Disadvantages

Advantages for the Seller:

• Maintains control over shipment arrangements and freight negotiations.
• Limits responsibility for risks once goods are loaded.
• Demonstrates commercial reliability by managing transport logistics.

Advantages for the Buyer:

• No need to manage shipment at origin—simplifies procurement.
• Freight costs are predictable and included in the purchase price.

Disadvantages for the Seller:

• Must bear freight costs, which may fluctuate due to market conditions.
• Responsibility to ensure timely loading and documentation.

Disadvantages for the Buyer:

• Bears risk of loss or damage during transit without seller-provided insurance.
• Limited control over choice of carrier or shipping route.

Application in International Trade

CFR is commonly used for bulk commodities such as coal, grain, crude oil, and industrial raw materials. It is particularly suitable when the seller has better access to shipping arrangements or lower freight rates due to existing logistics relationships.
Buyers often prefer CFR when they wish to simplify procurement at the origin port but are willing to assume responsibility for insurance and risk management.

Risk Management and Insurance Considerations

Because CFR transfers risk early in the transaction, buyers typically take out marine cargo insurance to protect against perils such as:

• Damage or loss during sea transport.
• Theft, piracy, or natural disasters.
• Port handling accidents or delays.