In this article, guest contributor Peng Xianwei, a partner at Beijing DeHeng Law Offices and a member of the ICC Commission on Arbitration and ADR discuss the key differences between the Incoterms® rules, CFR, and CIF.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of ICC Academy or ICC.
Incoterms® rules
Incoterms® rules are collection of standard contract terms developed by the International Chamber of Commerce (ICC) to facilitate international transactions, and to make clear the respective duties and obligations of buyers and sellers in facilitating international trade.
The main purpose of Incoterms® rules is to provide a legal framework that makes contracts in international trade clearer and easier to understand and perform, reducing the likelihood of disputes and legal action and boosting the efficiency of trade agreements and negotiations[1].
[1] Carr, I. (2009). International Trade Law (4th ed). Routledge-Cavendish, p. 5
Incoterms® 2020 Certificate
The gold-standard Incoterms® certification from ICC, the organisation that creates the rules. Available in English, Spanish, Chinese, and French.
CFR and CIF
In this article, we will focus on two maritime shipping terms CFR (Cost and Freight) and CIF (Cost, Insurance, and Freight), which are widely used in international trade [2].
Maritime transport, where these two terms are applied, is a crucial mode of transport in international trade and involves a large amount of goods and financial flows [3]. The choice of using either CFR and CIF directly affects the cost structure and risk management of the transactions.
It is therefore essential to have a thorough comprehension and correct application of these two maritime shipping terms to safeguard the interests of both transaction parties, preventing disputes during the execution and performance of contracts and expediting the progress of international trade.
[2] Murray, C., Holloway, D., & Timson-Hunt, D. (2007). Schmitthoff’s Export Trade: The Law and Practice of International Trade (11th ed.). Sweet&Maxwell Ltd, p. 34
[3] Notteboom, T., Pallis, A., & Rodrigue, J. P. (2022b).Chapter 1.1 Maritime Shipping and International Trade, Port Economics, Management and Policy. Routledge.; Carr, I. (2009). International Trade Law (4th ed.). Routledge-Cavendish, p. 5
Understanding CFR (Cost and Freight)
Under CFR, the seller must bear the cost and freight from the port of shipment to the port of destination. This term only applies to sea or inland waterway transport. ICC clarifies the responsibilities of sellers and buyers in the interpretation of CFR in the Incoterms® 2020 ICC rules for the use of domestic and international trade terms (ICC Publication: 723E, published by ICC in 2019), and guides each party regarding proper understanding of its role to play and to ensure the transaction is conducted smoothly.
Basic obligations of the seller under CFR
(1) To provide the goods stipulated in the contract and the official and valid bills of lading, invoices and other relevant documents in conformity with the contract
(2) To deliver the goods either by placing them on board the vessel, on the date or within the period agreed in the contract, in the manner customary at the port, as well as pay the costs of those checking operations necessary for delivery of the goods and the costs of the packaging of the goods [4] in a manner appropriate for the transport
(3) To bear all costs and risks until the goods reach the port of shipment and are delivered as above
(4) To be responsible for chartering and booking and paying the freight and all other costs resulting from such carriage, including the costs of loading the goods on board and transport-related security costs, on the usual routes. It is worth noting that, under CFR, the seller arranges transportation, and the buyer handles cargo insurance. Therefore, the seller must give notice of loading to the buyer in a timely manner after loading; otherwise, the seller may bear the risk of loss of goods in transit [5];
(5) To handle the export clearance formalities and pay for all export clearance formalities required by the country of export.
[4] Kouladis, N. (2006a). Chapter 9 Introduction to F.O.B. and C.I.F. Sales. In Principles of Law Relating to International Trade (4th ed.,). Springer US, pp. 201–202.
[5] Murray, C., Holloway, D., & Timson-Hunt, D. (2007). Schmitthoff’s Export Trade: The Law and Practice of International Trade (11th ed). Sweet&Maxwell Ltd, p. 53.
Basic obligations of the buyer under CFR
(1) To receive all agreed documents provided by the seller
(2) To take delivery of the goods when they have been delivered at the port of shipment and receive them from the carrier at the port of destination specified in the contract
(3) To bear the risk of loss of or damage to the goods from the time when the goods are delivered on board the vessel at the port of shipment
(4) Since the seller owes no obligation to the buyer to purchase insurance cover, the buyer would be well-advised therefore to purchase some cover for itself
(5) To go through the import customs clearance procedures and pay the duties, taxes and any other costs related to import clearance.
When do you use CFR?
Use of this rule is limited to goods transported by sea or inland waterway. CFR is suitable when the goods do not require high insurance and the seller has direct access to the vessel. Therefore, CFR is suitable for bulk or non-containerized goods or raw materials[6]. Meanwhile, the buyer may prefer CFR if they can better understand the local insurance practice and can obtain the insurance cover at lower premiums[7].
By choosing CFR, sellers can limit the risks during transportation, while buyers can better control their shipments at a lower cost.
[6] Noah, D. (2021, October 6). Incoterms 2020 CFR: Spotlight on Cost and Freight. Shipping Solutions.
[7] Carr, I. (2009). International Trade Law (4th ed.). Routledge-Cavendish, p. 35
Understanding CIF (Cost, Insurance, and Freight)
Basic obligations of the buyer and seller under CFR
The obligations of the seller and the buyer under CIF are essentially the same as those under CFR. Similarly, the mode of transport is limited to sea or inland waterway transportation.
The difference is that unlike CFR, under CIF, the seller must contract for insurance cover for the buyer against the risk of loss of or damage to the goods from the port of shipment to the port of destination [8].
It is important to note that under CIF, the seller can, subject to the sales contract, choose to obtain limited insurance cover with Institute Cargo Clauses (C) or similar clause, rather than with the more extensive cover under Institute Cargo Clauses (A).
Under CIF, if a claim later occurs within the insurance coverage, the buyer can make a claim directly to the insurance company through the insurance policy, and the seller is not responsible for whether the claim is successful [9]. Under CIF, although the seller is responsible for freight and cargo insurance, it does not promise to ensure that the goods arrive at the destination intact, in the specified quantity, or at all [10].
[8] Murray, C., Holloway, D., & Timson-Hunt, D. (2007). Schmitthoff’s Export Trade: The Law and Practice of International Trade (11th ed.). Sweet&Maxwell Ltd., p. 53; Carr, I. (2009). International Trade Law (4th ed.). Routledge-Cavendish, p. 35
[9] Murray, C., Holloway, D., & Timson-Hunt, D. (2007). Schmitthoff’s Export Trade: The Law and Practice of International Trade (11th ed.). Sweet&Maxwell Ltd., p. 50
[10] Murray, C., Holloway, D., & Timson-Hunt, D. (2007). Schmitthoff’s Export Trade: The Law and Practice of International Trade (11th ed.). Sweet&Maxwell Ltd., p. 44.
When do you use CIF?
CIF, like CFR, is designed for sea and inland waterway transport and is suitable where the sellers have direct access to the vessel for loading, such as bulk or non-containerised goods or raw materials, and CIF may be considered if the buyer does not have its own cargo insurance.
Read the article: Incoterms® 2020 vs 2010: What’s changed?
ICC Handbook on Transport and the Incoterms® 2020 Rules
A new publication providing clarity and practical support to those in the transport sector working on transactions involving the Incoterms® rules.
Comparative analysis of CFR and CIF
Main similarities and differences between the usage of CFR and CIF
Both CIF and CFR are used for sea or inland waterway transportation only. Under both terms, the seller is responsible for transporting the goods to the port of shipment and paying the freight to the port of destination.
The risk of loss of or damage to the goods transfers when the goods are placed on board the vessel at the port of shipment and the seller is deemed to have performed its obligation to deliver the goods, regardless of whether the goods arrive at their destination in sound condition, in the specified quantity, or at all.
Under CFR, however, the seller owes no obligation to the buyer to purchase insurance coverage. In contrast, CIF requires the seller to contract for insurance cover against the buyer’s risk of losing or damaging the goods, in addition to the seller’s obligation to pay for freight.
If the goods are lost or damaged during shipping, the insurer will cover the damages under the insurance policy, giving the buyer additional protection against transportation risks under CIF.
Potential costs and benefits associated with these two Incoterms®
Because the insurance fees are not included, CFR may have a lower price than CIF, which is its primary cost benefit. It works if the buyer is willing to take on greater risk in exchange for lower costs. This implies, however, that the buyer assumes the risk of loss or damage during transit, which potentially leads to higher overall costs should a claim need to be made.
CIF is a safer alternative for high-value items and where the seller is willing to, incur additional expenses as a result of having to pay insurance premiums[11]. Furthermore, the total cost may increase if the buyer decides to acquire additional insurance beyond CIF.
[11] Carr, I. (2009). International Trade Law (4th ed.). Routledge-Cavendish, p. 6
Incoterms® 2020 eBook
The latest edition of the authoritative ICC rules that define the responsibilities of buyers and sellers for the delivery of goods under sales contracts.
Case study illustration
Consider a hypothetical scenario where a seller concluded an export contract with buyer under CFR terms and the contract stipulates that the shipment time is before March 1.
The seller prepared the goods and finished loading on March 1, which is Friday. Due to the weekend, the seller’s salesperson did not send a freight notice to the buyer in time, and in the middle night of March 1, a fire accident happened on the vessel and the cargo was damaged. Unfortunately, the buyer did not finish purchasing insurance till after the weekend. Who should be responsible for the cargo damage?
From our perspective, the seller is required by CFR to give the buyer sufficient notice that the goods have been delivered at the port of shipment within the agreed time, as well as any other notice necessary to enable the buyer to take the measures normally required for receiving the goods.
In this case, the risk of the goods in transit under CFR may still be carried by the seller because the seller had not properly informed the buyer of the vessel’s name after sailing and the buyer had not yet received enough information for insurance.
Choosing the right Incoterms® rule
Selecting the appropriate Incoterms® rule is essential for seamless completion of the contract. CFR and CIF are two widely used trade terms that have some significant distinctions but also many similarities.
Both CFR and CIF require the seller to organise the products’ transportation to the port of destination. This implies that the cost of freight of the goods to the port of destination will be covered entirely by the seller. Another feature shared by CFR and CIF, is that risk is transferred from the seller to the buyer upon the placement of the goods on board the vessel at the port of shipment.
However, under CFR, the seller is only liable for the cost of freight to the port of destination; under CIF, on the other hand, the seller is also required to contract for specific insurance for the goods and to pay the premiums for that insurance, which could lead to a higher CIF price than under CFR price.
It is important to note that there is no one-size-fits-all answer as to whether CIF or CFR is suitable for your business and both parties should carefully consider their needs and the proper choice of sales terms.
For instance, if the seller chooses CFR and the buyer fails to contract for insurance, the buyer will be responsible for any loss or damage sustained during transportation, which could make it challenging for the buyer to pursue compensation. On the other hand, the seller may incur unnecessary financial risk if CIF is selected, but insurance is not properly arranged.
Therefore, both parties should carefully consider the suitable trade term based on their needs before concluding an international trade contract. Potential legal issues can be successfully reduced by understanding the precise language and responsibilities assigned under CFR and CIF, which will facilitate the smooth performance of international sales contracts.
Incoterms® 2020 Certificate
The gold-standard Incoterms® certification from ICC, the organisation that creates the rules. Available in English, Spanish, Chinese, and French.
