Incoterms 2010 (FCA, DAP, EX WORKS, CIF, FOB, CFR, DAT, etc.) define, in a purchase contract, the responsibilities of the buyer and the supplier in the transaction: transfer of ownership of the goods, payment of transportation costs and insurance, loading and unloading risks.
Incoterms have been issued by the International Chamber of Commerce in 2010 and revised in 2013.
Incoterms 2010 can be grouped in categories, which are “C” (CFR, CIF, CIP, CPT), “D” (DAP, DAT, DDP, DDU, DAF, DES), “E” (EX WORKS”), and “F” (FCA, FAS, FOB). Each Incoterm 2010 carries a set of responsibilities for the buyer and the seller, that should be understood before accepting a contract (by both parties!). Let’s review the most common Incoterms 2010 and their implications.
CFR (Cost and Freight)
CFR means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.
The CFR term requires the seller to clear the goods for export. This term can only be used for sea and inland waterway transport.
CIF (Cost, Insurance, and Freight)
CIF means that the seller delivers the goods on board the vessel or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
DIFFERENCE BETWEEN CIF AND CFR
The difference between these two Incoterms is that under the CIF term, the seller has to ensure the goods, whereas under the CFR Incoterm the buyer has this responsibility. CFR is used when a buyer prefers to rely on its own insurance company, rather than the sellers.