The CFR Cost & Freight Incoterms 2020 is the first of the C group, the category of Incoterms also known as Group C Shipping Contracts (technical name), but more informally also as confusing and contradictory because of the distinction between delivery and transportation that occurs under these provisions (for more about the C group Incoterm, you can refer to our article How to deal with Group C Shipping Contracts).
CFR Cost & Freight: one of the original Incoterms
CFR Cost & Freight, along with the CIF Cost, Insurance and Freight, was among the original Incoterms published by the ICC in 1936 (at the time called C&F); therefore, it was not meant for containerized goods, because the container was invented only in the 1950s, and was intended only for ocean or inland waterway transport, like many Incoterms of the time, since that was the major mode of transportation in international trade.
In fact, CFR is written: CFR Cost & Freight (named port of destination)
We already mentioned the distinction between delivery and transportation under the C group Incoterms; under the CFR Incoterm, the parties must indicate the port of destination, however, that parenthetic indication refers to the transport obligations of the seller, not to the transfer of risk from the seller to the buyer, which occurs at the port of shipment.
To state it more clearly: delivery occurs in the port of shipment when the goods are loaded on board the vessel, but the seller must pay transport costs up to the port of arrival. As a result, the risk shifts to the buyer at the port of shipment.
Delivery vs transportation: a practical example
Let’s make an example: suppose that a South African industrial company buys machinery parts from a manufacturer based in Finland. The machinery is too big, it does not fit into a container, therefore the parties agree that the sale contract be governed under CFR Cost & Freight Incoterms 2020. The machinery will leave Finland from the port of Helsinki and will arrive to South Africa at the port of Durban.
The Incoterm will state: CFR Cost & Freight (Durban).
The parenthetic reference to the port of Durban means that the Finnish seller will have to pay for transportation up to that point. However, since this is a C-group Incoterm, we know that delivery occurs at the port of Helsinki in Finland, when the machinery is loaded on the ship. In practice, after the machinery is loaded on the ship at the port of Helsinki, the Finnish seller is relieved from the risk of loss or damage, which shifts to the South African buyer. Still, the Finnish seller must arrange and pay for transportation of the goods up to the port of Durban.
Substitute CFR with CPT for containerized freight
Now, suppose that the object of the sale in the previous example is not outsized machinery; suppose that the South African firm buys a batch of clothes from an Italian textile manufacturer, i.e. containerized goods. Would the CFR Incoterm still be the provision of choice?
As we wrote also for other Incoterms published before the invention of the cargo, it is not mandatory not to use CFR, or FOB Free On Board for example, for containerized merchandise. However, to carry out the transaction correctly, it is recommendable not to use CFR, but to substitute it with CPT Carriage Paid To as an alternative C-group Incoterm.
Globartis Research
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