What Is Cost and Freight (CFR) in Foreign Trade Contracts?

What Is Cost and Freight (CFR)?

Cost and freight (CFR) is a legal term used in foreign trade contracts. In a contract specifying that a sale is cost and freight, the seller is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain them from the carrier.

With a cost and freight sale, the seller is not responsible for procuring marine insurance against the risk of loss or damage to the cargo during transit. Cost and freight is a term used strictly for cargo transported by sea or inland waterways.

Cost and freight used to be abbreviated as C&F. Then, in 1990, it was changed to CFR by Incoterms, a set of commercial trade rules established by the International Chamber of Commerce (ICC), after users complained of difficulties adding the ampersand symbol in telex messages and other technology used in the 1970s and 1980s.

Understanding Cost and Freight (CFR)

Contracts involving international transportation often contain abbreviated trade terms that describe matters such as the time and place of delivery; payment; the conditions under which the risk of loss shifts from the seller to the buyer; and specifying the party responsible for the costs of freight and insurance.

If a buyer and a seller agree to include cost and freight in their transaction, the seller must arrange and pay for transporting the cargo to a specified port. The seller must deliver the goods, clear them for export, and load them onto the transport ship. The risk of loss or damage transfers to the buyer once the seller loads the items onto the vessel, but before the main transportation occurs. This provision means that the seller is not responsible for securing insurance for the cargo for loss or damage during transportation.

Cost and freight is an International Commercial Term, also called an Incoterm. To facilitate foreign trade, the ICC publishes and regularly updates this set of globally recognized terms that help to create a standard for the terms of foreign trade contracts. Incoterms are intended to prevent confusion by clarifying the obligations of buyers and sellers, such as transport and export clearance obligations and the physical point where risk transfers from the seller to the buyer.

Similar Incoterms to Cost and Freight (CFR)

For goods transported internationally by sea or inland waterways, there are three other Incoterms that are closely related to CFR and are frequently used in trade contracts.

• Free alongside ship (FAS) means that the seller only has to deliver the cargo to the port next to the vessel, and responsibility for the goods shifts to the buyer at that point.
• Free on board (FOB) requires the seller to also load the goods onto the ship.
• Like CFR, cost insurance and freight (CIF) requires that the seller arranges for the carriage of goods by sea to a port of destination, but the seller has the additional obligation of insuring the goods until they reach the destination port. In CFR, the seller is not responsible for insuring the goods until they reach the destination port.

The Bottom Line

Cost and freight (CFR), an Incoterms rule that’s applicable only to cargo transported by sea or inland waterways, puts a fair bit of responsibility on the shoulders of both the buyer and the seller. Under these agreements, which are fairly common in international trade, the seller is responsible for all the planning and costs associated with exporting goods by sea to the destination port specified by the recipient. However, as soon as the goods are loaded on the vessel, the buyer is responsible for providing marine insurance on them—and for transporting the goods via truck to their final destination, import fees, and so on.