Incoterms 2010 – Some points to note with CFR (Cost and Freight)

It can sometimes take time for a new phrase or wording to replace an old established one.  This is certainly the case with the incoterm C and F, which I keep coming across on a regular basis, even today.  This incoterm, which means Cost and Freight, was replaced in the ICC’s (International Chamber of Commerce) 1990 revision of their incoterms with CFR, meaning … Cost and Freight.

Essentially the ICC’s objective at the time was to standardise all their incoterms into three letter derivatives, and C and F, although well established in the international trade nomenclature, did not fit the pattern.  Hence it was changed.  However, 23 years on, I still find it being used.  There is actually nothing wrong with this.  If the seller and buyer wish to continue using C and F, there is nothing stopping them doing so, as long as they state that they are using the 1980 version of Incoterms in all the relevant and accompanying export documentation.

Like FAS and FOB, the ICC requests in the 2010 terminology that CFR is now only used for sea or inland waterways transport, but not including container shipments.  This is because containers are not actually delivered straight to the vessel; they are delivered to the Carrier at a terminal or container staging post.  And like FOB, the seller “delivers” the goods when they are physically placed on board the vessel or the buyer procures the goods already so delivered.  It is at this point that the risk passes from the seller to the buyer – when the goods are delivered on board the vessel at the port of export.  The main difference between FOB and CFR is that the seller additionally contracts for, and pays for, the costs and freight to the named port of destination.

This idea that the risk passes at the port of export has often caused confusion in the past, since a common misunderstanding is the belief that since the seller arranges and pays for the freight the risk only passes to the buyer once the goods arrive in the named port of destination.  I do have to stress that this is not the case.  Since this is the term that will more often than not be involved with the shipment of commodities, it is important to realise exactly where the point of risk passes and to document this in the sales contract.
If payment between buyer and seller is by Documentary Credit, then the CFR term is a much better term to use than EXW, FAS or FOB.  If the seller has to submit, as part of the supporting documentation, the original Bills of Lading, then technically this can only be achieved if the seller is the shipper of the goods.  With any of the previous three incoterms, the buyer is the shipper of the goods, and so the seller has no legal right to ask for the Bills of Lading from the shipping company. In practice, the buyer usually does authorise the shipping company to state the seller as the shipper and to release the Bills to the seller, but they don’t actually have to.

Please note that an Ocean Bill of Lading is rather a unique document, in that it is the only document which carries title to the goods.  This does literally mean that whoever holds the original Bill of Lading holds title to the goods as well.  In theory (and practice) the Carrier will release the goods to anyone who presents them with an Original Bill of Lading for the shipment.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other articles on the Point to Point Export Services website at www.point-point.com

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