At times, importing from China to any global destination can be a hustle.
It is even worse if you don’t choose the right Incoterms 2010.
For the last couple of weeks, I have been helping importers choose the right Incoterms through various blog posts.
And, today, I want to take you a step further and explore – CFR.
It is an important Incoterm you must know when doing any international trade.
So, in this CFR Shipping guide, I will take you through the following:
Now, let’s dive right into the main subject of this section.
What’s the Different Points between FOB, CFR and CIF?
FOB: the buyer takes responsibility of booking and chattering, handling of insurance, prepaid freight and
payment of insurance.
CIF: the seller has the responsibility of booking and chattering, handling of insurance, prepaid freight and payment of insurance.
CFR: the seller assumes the responsibility of prepaid freight and charter booking while the buyer takes care of all the insurance activities and pays for them.
A times, going about this process can be cumbersome.
That’s why BanSar is here to solve all your shipping needs.
We will help you choose appropriate Incoterms whenever you’re shipping from China.
What is Essential Obligations of the Buyer?
Takes responsibility of paying all the costs that are incurred as spelled in the binding agreement.
On his side, he will take care of the import documents and licenses that will be required to allow the goods into the country.
Takes responsibility for all the risks on the cargo that will be incurred after they have been loaded on the ship and are ready for transport.
All the insurance procedures and the payment of insurance premiums are handled by the buyer especially when they have been loaded on the ship.
The buyer becomes the recipient of the goods at the particular port where the goods were destined to be. He receives all the documents and handles them in accordance to the agreement between him and the seller.
What is the Obligations of the Buyer?
The buyer is expected to obtain all the official documents and import licenses at their own expense and risk.
In case custom formalities are to be adhered to, he will have to step up and handle all the formalities related to it.
Transit fee through other counties are also expected to be taken care of by the buyer.
The risks involved in transportation of goods from the seller after it has crossed the rail of the ship are usually the responsibilities of the buyer.
The buyer is expected to accept the documents that have been sent to him by the buyer. Also, check on the goods sent and subsequently accept them then make the necessary payments that have been included in the contract.
Apart from the cost of the usual freight, the buyer is expected to incur other costs such as transportation, offloading cargo and the cost of freight and terminal fees.
All these are responsibilities of the buyer and he is supposed to pay for them accordingly.
What is CFR?
CFR is an initial of a combination of two words which are Cost and Freight.
It is also common to come across the initial CNF when reading through the same content on Cost and freight.
There is no need to worry because they stand for the same thing.
CFR – Photo courtesy: International Commercial Terms
The world has developed to a point where business is being conducted across borders.
People are continuously purchasing and selling goods and services from different countries all over the world.
As result, you may need to ship a range of goods from one point to another.
Heavy goods usually require transport by sea (ocean freight or sea freight) and this is the point where cost and freight comes in.
CFR is therefore better understood as an Incoterm where the seller pays for the cost and freight of transporting cargo from one port to another.
Apart from that other charges incurred during the trip such as getting it from the warehouse, transport to the destined port, delivery of the cargo and customs are also catered for by the seller.
In other words, CFR is an internationally agreed term where the seller is expected to assume all the responsibility in terms of cost from the factory to the point where the buyer will be collecting his goods.
As soon as the cargo has been delivered to the buyer, all responsibility ceases to be on the seller.
In case of further transportation to other destinations, the buyer will have to carter for the expenses.
It is important to note that the buyer will also be responsible for the cost of off-loading the cargo from the ship and any other cost that will be incurred depending on the rules of the destined port.
Having said that, let me take you back to the basics.
I know if you are importing from China for the first time, the term Incoterm can be somehow challenging.
Let me break it down for you.
What are Incoterms?
Incoterms basically refers to the International Commercial Terms.
Now, Incoterms are pre-defined commercial terms that relate to international commercial law.
It the International Chamber of Commerce that published the Incoterms.
As I had mentioned earlier, that are many Incoterms (about 11 Incoterms).
Through these Incoterms, importers and exporters know when the tasks, responsibilities, risks or costs shift from one party to another.
However, for the scope of this guide, I will focus on the CFR.
With that brief background information about Incoterms, let’s come back to the main subject of this article.
Breaking Down CFR
Shipment of goods through international waters or sometimes inland waterways usually dictates a number of terms.
The terms involved in conducting this kind of transport ranges from:
- Place and time of delivery
- Conditions under which the risks involved shifts between the seller and the buyer
- Cost of insurance among other things.
It is important to note that CFR is strictly involved in transport of goods and does not meddle in any other form of transaction other than transport.
Examples of the Related Commercial Terms
Apart from CFR, there are three other terms that are being used in international shipping and inland water transport of goods.
- Free alongside ship – means the responsibility of the seller ends when he/she delivers the goods to the port alongside the vessel that is supposed to transport it. At this point the buyer takes responsibility of loading it up into the ship and transporting it all the way to the destination port.
- Free on Board – means that the person selling the goods will have to go a step further to make sure that the goods are loaded onto the ship.
- Cost Insurance and Freightis quite similar to CFR. Here, the seller is forced to insure the goods he/she is selling all the way from the source to the port where it was expected to reach.
The cost of shipping goods from one port to another is often calculated using the formulas below.
Please note that the formulas are used in the calculation of Cost and Freight.
In this case FOB has been introduced in the formula which will be explained below.
CFR Price = FOB Price + Shipping
CFR Price = CIF Price X [1 – (1+ Insurance Premium) X Insurance Rate]
FOB: is an initial that is mostly used in the shipping industry which stands for “free on board” or “freight on board”.
It is in other words, a designation that is used as an indicator of the period when ownership and liability of goods ceases to be on the seller.
And thereafter, the buyer assumes full responsibility.
In case a physical address has been identified, its designation is the determinant of the party with the responsibility of payment for the freight charges.
Not forgetting the point where responsibility is passed from the seller to the buyer.
As an example in international shipping:
“FOB (name of originating port)”, means the consignor (seller) takes the responsibility of paying for the cost of transport to the loading point and the cost of loading.
The consignee (buyer) on the other end caters for the cost of:
- Ocean freight
- Further transport from the destination port
In this case the consignor passes all responsibility to the consignee once the goods are loaded on to the ship.
CIF Price: is an initial which stands for Cost, Insurance and Freight depending on the named port of destination.
In this case the seller assumes responsibility of paying the cost of freight and insurance all the way to the destination port.
It however gives the buyer the responsibility of all the risks that are involved once the goods are on the ship.
Analysis of the 1990 CFR
Here what you should know about the 1990 CFR rule:
As soon as the goods or the cargo goes through the ship’s rail at the port where it is being shipped from, the consignor completes the process of delivery.
At this point, the seller has already paid the cost of freight at sea to the port where it was destined to go.
The seller also incurs the cost of risks involved in case of any damages or loss of the goods at sea.
Apart from that, the seller also assumes responsibility for the cost of booking and chattering, normal cost of shipping to the destination point.
The other obligations assumed by buyer and the seller are explained below.
Essential Obligations of the Seller
- Takes full responsibility for the delivery of goods from the warehouse or factory to the port where the goods are to be loaded on to a ship.
- He/she takes care of the costs incurred during this kind of transaction making sure that the goods are loaded and ready for shipment.
- He/she does everything in accordance to the contract that was signed between him and the buyer taking note of the time and place after which the buyer is notified.
- Handles all the procedures leading to the export of the goods including all the export approvals and licenses from the country where the goods are coming from.
- Takes responsibility of booking and chattering and then making the relevant payments on the cost of freight all the way to the destination port.
- Caters for any costs that is incurred from the port of shipment including the cost of loading the cargo onto the ship.
- Provides all the commercial invoices and other shipping documents that will be required for the shipment of goods to the destination port.
- The parties involved which include the buyer and the seller, may opt for electronic communication. At this point all the relevant documents are replaced by equivalent information in electronic data.
A contract stipulated according to the CFR considerations is not complete unless the inclusions explained in the following paragraphs are agreed upon.
- The CFR terminologies has a section on shipping notification issues which requires very close attention. It requires the seller to do arrangements on transport as the buyer handles the insurance. This means that before the cargo is lifted into the ship, or before the buyer assumes all the responsibility, he has to make sure that the goods are insured as stipulated in the contract.
The seller is also expected to notify the buyer that the cargo is on board a particular ship with the relevant details or else the seller will be in breach of the stipulated contract.
- The cost of unloading the cargo from the ship is usually a variant in CFR terminology.
- The terms stipulated on the CFR considerations with regards to the liner terms state that the cost of offloading are usually handled by the conditions of the liner and are usually taken care of by the seller.
- CFR ex ship’s hold, is a phrase implying after the cargo has been transported all the way to the port where it was meant to go, the buyer will assume all the responsibility from that point. This includes the cost of offloading the goods from the ship, on to the bilge and then to the port.
There are however other conditions that are stipulated on the CFR which should not be a real issue as they seek to clarify more on the matter of unloading fees.
- CFR ex tackle, refers to the cost that the buyer has to incur when the goods have been delivered to the port, offloaded from the bilge and to the terminal.
The additional information on the same is just for clarification and does not influence the meaning of the stipulated rules and conditions.
- CFR landed, refers to the idea that the seller will have to pay for the cost of offloading the cargo from the ship on to the port where it was destined for.
2000 CFR Analysis
General principals stipulated in the 2000 CFR, clearly stipulates that the CFR terminologies are allowed to be used only on inland waters navigation and in shipping.
In case the parties that have a particular contract are not interested in using any form of delivery over the rail of the ship, CPT terminologies kick in.
They will be used in these circumstances.
The interpretation of the 2000 CFR by the International Chamber of Commerce states that the obligations of the seller and the buyer are stated and divided as explained below.
Obligations of the Seller
- The seller is expected to obtain license and other official documents that will be used in the export of the cargo at his own risk and expense.
They are also to be available in handling all the formalities required for the export of goods in case they are required to do so.
- He is expected to read and understand all the terms stipulated on a contract that will be used as the agreement form allowing the goods to be transported from one port to another.
He will therefore sign the contract then makes sure that the goods are loaded at the time and place written on the contract.
After that, he is expected to inform the buyer that the cargo is on-board and will be ready for shipment after paying all the charges.
- In this contract, the buyer is excused of any form of responsibility on the risks that the goods face as it crosses the rail onto the ship.
- Provision of the usual documents of transportation is done by the seller. In case both parties agree on electronic form of communication, all the relevant documents are usually replaced by electronic data interchange EDI. The system is as effective as the physical documents.
Incoterm for International Trade
Differences and Links between CFR and EXW, FOB and CIF
Foreign Trade Quotation Method
Transfer of ownership
|Cost plus Freight||Port of Shipment||Seller Responsible||Buyer Responsible||Seller Responsible||Buyer Responsible||Port of shipment||Transfer with the delivery|
|Factory Delivery Price||Exporting Country, Warehouse or Factory||Buyer Responsible||Buyer Responsible||Buyer Responsible||Buyer Responsible||Place of Delivery||Transfer with sale|
|FOB||Port of Shipment||Buyer responsible||Buyer Responsible||Seller responsible||Buyer Responsible||Port of Shipment||Transfer with the delivery|
|CIF Price||Port of Shipment||Seller responsible||Seller Responsible||Seller Responsible||Buyer Responsible||Port of Shipment||Transfer with the delivery|
The points that are very common in CFR, CIF and FOB are often seen in three types of foreign trade quotations as explained below:
- Loading the goods and informing the buyer of the progress is the responsibility of the seller while the buyer has the responsibility of receiving goods sent to him.
- Export formalities plus all the documents involved are supposed to be handled by the seller while on the other hand the buyer should be ready to handle all the formalities of importing the goods with all the relevant documents.
- The bills incurred in export are to be paid by the seller while the bills incurred by imports are to be received and paid by the buyer.
- Delivery of goods at the port where they are to be loaded for shipment, the risks and cost involved are taken care of on the ships side.
- Other deliveries of the same nature include the delivery of vouchers and subsequent voucher payments.
- They are all bound and restricted to inland water transport and international or marine water transportation.
Once you identify the supplier or goods you want to buy, BanSar will handle everything for you.
Like other Incoterms, CFR also plays a fundamental in international trade.
And, at this point, I am sure you can explain everything about CFR shipping terms.
But more importantly, you should evaluate all options available at your disposal to choose an appropriate Incoterm.
Now, it’s your turn.
Are you importing goods from China?
Or, you want to learn more about Incoterms.
Well, talk to us today – we will make your shipping simple and easy.