Cost and Freight (CFR)

Definition

Cost and Freight (CFR) is a trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain the goods. Under CFR, the seller does not have to procure marine insurance against the risk of loss or damage to the goods during transit. The term is only applicable for sea or inland waterway transport.

Phonetic

Cost and Freight is phonetically pronounced as: kɔːst ænd friːt

Key Takeaways

1. Legalities and Responsibilities: Under a CFR arrangement, the seller is legally obligated to arrange for the transportation of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain the goods from the carrier. However, the risk of loss or damage is transferred to the buyer once the goods are loaded on the ship at the origin port.
2. Insurance: A key aspect of CFR is that the seller is not responsible for insuring the goods for the maritime transit. If the buyer wants insurance protection, they have to arrange it at their own cost. This is a major difference between CFR and Cost, Insurance, and Freight (CIF), where the seller is required to insure the shipment.
3. Cost implications: CFR includes all costs needed to bring the goods to the destination port, like packing, documentation, export duties, and freight charges. But it doesn’t cover costs at the destination port (like import duties or unloading charges) or beyond. These are the buyer’s responsibility which they must account for in their budgeting.

Importance

The business/finance term “Cost and Freight” (CFR) is significant as it denotes a precise commercial term used in international trade contracts. It affects both the buyer’s and seller’s roles and responsibilities in the transaction. Under CFR, the seller is obligated to arrange and pay for transporting the goods to the named port of destination. This includes all costs and freight charges to get the goods onboard the ship. However, the risk of loss or damage to the goods, as well as any additional cost due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer. Understanding CFR is crucial for creating clarity in contracts, allocating risks and costs appropriately, and avoiding potential disputes or confusion later on.

Explanation

Cost and Freight (CFR) is essentially a type of trade agreement used in international trade, designed to help facilitate transactions by clearly defining buyer and seller responsibilities. Its main purpose is to provide a clear framework within which the seller assumes, among other factors, the cost of freight to transport goods to a specified destination. The advantage is that it eliminates disputes about accountability during the shipping process, allowing trade to continue smoothly and for businesses to expand commerce with their international partners.In practise, under a CFR agreement the seller is responsible for arranging and paying for the transportation cost of goods via sea to a destination agreed upon by both parties. The seller also assumes all risks until the goods are loaded on the vessel for shipping. Upon arrival at the destination, the buyer assumes responsibility for unloading costs, duties, and any other costs associated with bringing in the goods into the country. It’s crucial that businesses utilizing such agreements thoroughly understand them to avoid legal disputes and logistical complications that could harm the profitability of the transactions.

Examples

1. A Fashion Retailer’s Shipment: A clothing retailer based in Boston decides to source fabrics from a supplier in Vietnam. In this case, the supplier may suggest a Cost and Freight (CFR) agreement where they are responsible for arranging and paying for the shipping, up to when the fabrics reach the port in Boston. However, the merchant from Boston has to cover insurance costs.2. Import/Export of Cars: An American automotive company imports car parts from a manufacturer in Germany. As per their CFR agreement, the Germany-based manufacturer is responsible for all costs (including taxes, duties, and charges) and freight required to bring the car parts to a designated seaport in America. However, from that point forward, the American company bears all risks and insurance liabilities.3. Agriculture Trade: A grain distributor from Canada decides to export corn to a large farm in South Africa. Under the CFR terms, the Canadian company organizes and pays for all the expenses involved in transporting the corn from Canada to a specific port in South Africa, potentially taking responsibility for loss or damage until the grain reaches the destination port. However, the responsibility for insurance lies with the South African farm.

Frequently Asked Questions(FAQ)

Related Finance Terms

• International Commercial Terms (Incoterms)
• Bill of Lading (B/L)
• Freight forwarder
• Cargo insurance
• Port of destination

Sources for More Information

• Investopedia
• The Balance SMB
• Easyship Blog
• Global Negotiator