Why Shipments Get Delayed When Everything Seems “Paid For”
As part of international trade, a corporation ships expensive electronics from Shanghai to Hamburg. The ship leaves on schedule and the freight is paid, but when the cargo gets there in bad shape, the two sides start blaming each other. The seller says they performed their part because they paid their share of the shipping costs. The buyer says that it wasn’t his job to keep the merchandise safe while it was being sent. The person who did it? CFR is one of the Incoterms that people often get wrong.
Every year, this happens thousands of times in global trade, costing millions of dollars in lawsuits, wasted time, and broken relationships. Knowing the trade terms is only part of learning about CFR (Cost and Freight). You also need to grasp how risk moves so that your bottom line is protected and foreign transactions go smoothly.
You will learn exactly how CFR works, when it is best to utilize it, and, most importantly, how to avoid the costly mistakes that may trip up even the most experienced traders in the dark by reading this detailed book.
What Is CFR Incoterm?
In contrast to cost insurance and freight (CIF), cost and freight (CFR) is an Incoterm where a seller handles the clearance of goods, loads them onto the vessel, and pays for the freight to deliver the goods to the designated port of destination. However, and this is crucial, the risk is transferred to the buyer at the port of shipment once the goods cross the ship’s rail.
This brings about a special circumstance in which the cost responsibility and the risk responsibility part ways at varied levels:
- Cost responsibility: Seller up to the destination port.
- Risk responsibility: Transferred to the buyer upon loading of the goods into the vessel.
Key Characteristics of CFR:
- Only applies to transport via inland waterways or sea.
- The seller takes care of the export business and freight money.
- The buyer takes the risk after the goods have been loaded on the ship.
- The seller is not subject to mandatory insurance (as is the case with CIF).
- Usually applied to bulk cargo goods and non-containers.
Pro Tip: CFR is a gap between paying and risk bearing. Insurance arrangements should always be clarified in advance to prevent disagreements.
Seller vs Buyer Responsibilities Under CFR
| Party | Responsibilities |
| Seller | • Export clearance and documentation<br>• Inland transport to port of shipment<br>• Loading costs and export handling<br>• Freight payment to destination port<br>• Provide bill of lading and shipping documents |
| Buyer | • Marine insurance (optional but recommended)<br>• Unloading at destination port<br>• Import customs clearance and duties<br>• Transport from port to final destination<br>• Bear risk from point of loading |
Critical Gap: The Insurance Question
In CFR, insurance coverage is not required to be done by the seller. This implies that goods are shipped at the risk of the buyer without any protection or guarantees unless the buyer takes cover on his or her own or chooses to obtain international commercial terms insurance.
Common Mistake: Most purchasers think that freight costs are insured under CFR terms. Under CFR, it doesn’t. Instead, invariably secure separate marine insurance or make CIF conditions seller loads.
CFR vs CIF vs FOB: Quick Comparison
To avoid expensive misunderstandings, purchase insurance. It is important to know what CFR is compared to related Incoterms:
CFR vs CIF
- CFR: The freight is paid by the seller, and insurance is taken by the buyerwith direct access.
- CIF: Freight and minimum insurance cover are borne by the Seller.
- When to select: CIF is to be used in the situation when you prefer to be insured by the seller; CFR is to be used in the situation when you prefer to control the terms of insurance buyer assumes.
CFR vs FOB
- CFR: Seller meets freight at the port of destination.
- FOB: The expenses of the seller stop with the loading of goods (buyer pays freight).
- Choosing when: FOB is to be used when the buyer is better placed in terms of freight rates, and CFR is used when the seller has freight benefits.
| Incoterm | Seller Pays Freight | Seller Provides Insurance | Risk Transfer Point |
| FOB | No | No | Ship’s rail (loading port) |
| CFR | Yes | No | Ship’s rail (loading port) |
| CIF | Yes | Yes (minimum) | Ship’s rail (loading port) |
When to Use CFR in Shipping
CFR is a good fit in certain situations and may cause problems in other circumstances:
Recommended For:
- Bulk cargo (grains, oil, minerals) to which the sellers have developed shipping associations international chamber.
- Break-bulk cargo in which there is a clearly scaled loading.
- Cases of buyers’ desires to have the liberty of insurance and seller gains the benefits of freight shipping terms.
- Frequent trade routes in which parties are familiar with port practices cost transfer.
Avoid CFR For:
- Containerized transfers in which the loading/risk transfer point is not clear.
- Electronics with high value or delicate products that need special insurance shipping vessel.
- New relationships without a developed level of trust and performance.
- Destinations that have complicated unloading needs.
Pro Tip: When making container shipments, use CPT (Carriage Paid To) rather than CFR because it is more appropriate for multimodal transport.
Addressing Ancillary Costs
CFR does not necessarily apply to:
- Demurrage fees (vessel waiting time)
- Destination unloading expense.
- Beyond free time, port storage charges.
- indirect route transshipment costs.
To be on the safe side, always state such responsibilities in your contract.
Real-World CFR Examples
Example 1: Successful CFR Implementation
A South Korean steel manufacturing company exports bulk iron ore to Rotterdam under CFR conditions:
- Seller prepares: Export permits, loading at Busan port, vessel booking, and payment of freight at Rotterdam.
- Arrangements in the buyer’s part: Marine insurance, unloading at Rotterdam, clearance at the customs, and inland transportation to the factory.
- Risk transfer: Risk transfer after cross-shipping in Busan.
- Outcome: There are no set responsibilities, no conflicts in transaction.
Example 2: CFR Gone Wrong
A laptop exporter transports laptops between Shenzhen and Miami on CFR:
- Issue: The Container was damaged in a storm at sea.
- Position of Seller: We paid freight as it was agreed–risk at loading passed
- Buyer position::We thought the insurance was covered by CFR.
- Outcome: 50,000 dollar loss, ruined relationship, lawsuits.
- Lesson: An insurance or should have been CIF ought to have been taken by the buyer.
Best Practices for CFR Contracts
1. Specify Unloading Responsibilities
CFR does not necessarily involve destination unloading expenses. Clearly state:
- CFR Rotterdam, unloading on behalf of the buyer.
- CFR Hamburg, to quay discharge.
2. Clarify Insurance Arrangements
- Name of marine insurer.
- Stipulate minimums of coverage in case the buyer does so.
- Include: Buyer to take extensive marine insurance.
3. Define Demurrage Agreements
Avoid expensive wastes of time by specifying:
- Destination allowances of free time.
- Demurrage rate per day
- Demurrage split of any applicable costs.
4. Use Precise Port Names
Do not quarrel with certain destinations:
- ✅”CFR Port of Hamburg, Germany”
- ❌ “CFR Hamburg area”
5. Consider Alternatives When Appropriate
- CPT Multimodal/Container transport
- CIF in case insurance by the sellers is favored.
- FOB in case of superior freight rates by the buyer.
CFR at a Glance: Visual Summary
Seller Responsibilities:
- Clearance and documentation of exports.
- Loading and export handling
- Destruction payment to the port.
- Provide shipping documents
Buyer Responsibilities:
- Marine (recommended) insurance.
- Unloading at destination
- Customs and customs duties.
- Risk from the point of loading
Best For:
- Bulk and break-bulk cargo
- Established shipping relations.
- Customers prefer insurance.
Avoid For:
- Container shipments
- High-value fragile goods
- Complex port operations
Conclusion & Key Takeaways
CFR, which stands for “cost and freight,” is a compromise structure in which sellers benefit from their expertise in shipping while customers have the option to obtain insurance in accordance with the terms of international trade treaties. However, the distribution of cost and responsibility is fraught with contention, as is typical in CFR transactions. The division of cost and risk is not free, and the distribution of cost and responsibility is expensive.
The master agreements for insurance, unloading, import clearance, and ancillary expenditures are crystal clear, which is an essential component for the successful implementation of CFR. With the right framework, CFR makes it possible to convey large quantities of goods efficiently. In the event that it is misinterpreted, it leads to expensive mistakes in responsibility that are detrimental to all parties involved in the pre-cargo inspection. An example of this would be the use of CFR when dealing with bulk commodities when there is an established business relationship, such as in situations requiring inland waterway shipping. On the other hand, CIF or CPT can be applied when dealing with containerized shipments or when it is preferable to have the entire seller’s responsibility.
When it comes to the coverage of insurance or the unloading requirements under CFR, have you ever been puzzled about either of these things? Share your thoughts in the comments section below; your experience may be able to assist other traders in avoiding mistakes that are financially detrimental, as was demonstrated in the discussion of freight costs that took place on Trade Finance Global!