CIF and CFR (C&F): Obligations of the Parties and Transfer of Risks

This article aims to provide a basic understanding of CIF and CFR terms. It also discusses some of their variants – CIFFO and C&FFO. These terms are usually used with Incoterms.

Incoterms, or International Commercial Terms, are a set of standardized rules published by the International Chamber of Commerce (ICC) to facilitate international trade. These rules outline the responsibilities, costs, and risks of the parties in international trade. When parties refer to Incoterms, they incorporate the latest edition of the rules. The most recent version, Incoterms 2020, has been in effect since January 1, 2020.

General meaning of CIF and CFR (C&F)

CIF stands for “Cost, Insurance, and Freight”. It means that the seller is responsible for arranging and paying for the cost of goods, transportation, and insurance coverage up to the destination port. The seller bears most costs until the goods arrive at the destination port.

CFR (C&F) stands for “Cost and Freight”. It is often used interchangeably with C&F. Under CFR, the seller arranges and pays for the transportation of the goods to the destination port, similar to CIF. However, insurance coverage is not included in this term. The buyer is not obliged to insure the goods. However, they can arrange and pay for the insurance if they choose to do so.

There are also other similar terms, such as CIFFO and C&FFO. They are extensions of CIF and CFR, respectively, with an added “Free Out” component. Essentially, CIFFO is CIF with the added responsibility of unloading the goods at the destination port. Similarly, C&FFO is C&F with the same added responsibility of unloading. The “Free Out” component allocates discharging costs to the seller or buyer based on contract terms. “Free out” is not provided for in Incoterms. It is recommended to clarify its meaning in the contract to avoid doubts.

CIF & CFR (C&F) in Incoterms and Gafta

Some widely used pro formas in international trade, such as Gafta (Grain and Feed Trade Association), expressly exclude Incoterms (for instance, Gafta 48, clause 29(d)):

The exclusion of Incoterms in Gafta pro formas helps avoid potential contradictions between the generalised Incoterms and the more specific Gafta provisions that are tailored to address the aspects of agricultural trade.

Gafta pro formas are governed by English law, ensuring that the contracts adhere to a consistent legal framework. Any elements not expressly covered by Gafta provisions are subject to the Sale of Goods Act 1979 and common law. This combination of Gafta provisions and English law provides comprehensive guidance for parties engaged in agricultural trade.

However, if the contract mentions Incoterms, the contract text overrules the pro forma.

Duties of the CIF and CFR (C&F) Seller

As can be seen below, sellers’ duties under CIF and CFR (C&F) contracts largely overlap.

Common duties for CIF and CFR (C&F)

Under all terms, the seller is responsible for the following obligations:

• Shipping the goods

The seller can either load the goods onto a vessel or purchase cargo afloat. The latter is a common practice in international trade involving multiple sales down a chain. Goods must be shipped within the contractually agreed shipment period. Typically, the date on the bill of lading serves as the shipment date.

This is a simplification. Under English law the bill of lading date is only a rebuttable presumption of the shipment date, and what legally matters is the moment loading is actually completed. Detailed analysis: Shipment on the Last Day of the Period: B/L Date or Actual Completion of Loading?.

The goods must meet the correct description, quality, and quantity specified in the contract.

Contracts usually require the seller to notify the buyer upon completion of this duty, providing information such as the ship’s name, bill of lading dates, and quantity shipped (e.g., Clause 7 of FOSFA 54 (Declaration of shipment) or Clause 11 of Gafta 48 (Appropriation)).

• Contracting or procuring a contract of carriage to the destination point

Typically, this involves chartering a vessel and paying the freight. In sales down the chain, the seller may purchase bills of lading marked “freight prepaid.”

• Providing the buyer with shipping documents

This includes bills of lading, commercial invoice, and other contractual documents such as certificates of weight and quantity, origin, phytosanitary certificates, fumigation certificates, etc.

Specific duties for CIF terms

Apart from the duties mentioned earlier, under CIF terms, the seller must also:

• Obtain and pay for the insurance policy
• Provide the buyer with the insurance certificate along with the shipping documents

Under Incoterms 2020, the main requirements for cargo insurance include:

• Compliance with the coverage provided by Clauses (C) of the Institute Cargo Clauses (LMA/IUA) or similar clauses
• Coverage for the contractual price plus 10% (i.e., 110%) in the contract’s currency
• Coverage for the goods from the point of shipment to the port of destination

The Institute Cargo Clauses (LMA/IUA) are a set of standardised clauses developed by the Lloyd’s Market Association (LMA) and International Underwriting Association (IUA) for use in marine cargo insurance policies. These clauses outline the terms and conditions under which cargo insurance coverage is provided. This includes the risks covered, exclusions, and the rights and obligations of the insured and insurer.

There are three main types of Institute Cargo Clauses: A, B, and C. Each offers a different level of coverage, with A providing the broadest coverage and C offering the most limited coverage.

Some contractual pro formas, such as Gafta and FOSFA, contain alternative arrangements regarding insurance. For instance, Clause 14 of Gafta 48 provides the following:

Gafta CIF contracts incorporate Gafta 72, which are insurance terms specifically designed for Gafta contracts.

Duties of the CIF and CFR (C&F) Buyer

In CIF and CFR (C&F) contracts, the buyer has comparatively fewer duties than the seller. The main responsibilities of the buyer include:

• Accepting the contractual documents and paying the purchase price
• Fulfilling any other contractual obligations (e.g., opening a letter of credit)

On CFR terms, the buyer may choose to insure the goods on their own initiative. In such cases, the seller is obliged to provide all necessary information and documents to facilitate the insurance process.

CIFFO and C&FFO terms

Initially, all expenses associated with the vessel are the seller’s responsibility. On the other hand, contracting and paying for handling the goods at the port of discharge is the buyer’s responsibility. In particular, Clause 15(a) of Gafta 48 provides that:

Under Gafta pro formas, “Free Out” terms allocate costs associated with unloading to the buyer. Clause 15(b) of Gafta 48 provides:

Export and import formalities

Under both CIF and CFR terms, the seller is responsible for export-related obligations associated with the shipment of goods. This encompasses securing necessary export licenses, permits, and completing customs clearance procedures.

Similarly, the buyer bears the responsibility and costs for obtaining import licenses, permits, and handling customs clearance. As a general rule, the seller is not liable if the buyer faces difficulties in importing the goods at the destination point. However, the seller must provide assistance to the buyer, upon the buyer’s request, and at the buyer’s risk and expense, in obtaining any documents or information required for transit and import clearance formalities.

Risk and property transfer

Now, let’s explore the transfer of risk and property ownership under CIF and CFR (C&F).

Transfer of risk

Under all four terms, the risk of loss or damage to the goods transfers from the seller to the buyer upon shipment – i.e. when the goods are loaded onto the vessel. From that point onward, the buyer assumes the risk. Any damage or loss that occurs during transit is the buyer’s responsibility.

Why does it matter? Let’s consider an example:

A buyer and seller agree on a contract for 10,000 metric tons of Ukrainian wheat under C&F Barcelona terms. On 15 April, the wheat is loaded onto the MV “Grain Express” in Odesa, and the vessel sails. On April 18, just two days after passing the Bosphorus Strait, the MV Grain Express sinks, resulting in the total loss of the wheat cargo.

In this scenario, the buyer must still pay for the cargo, as the risk of loss or damage transferred to them upon loading on April 15. Though such situations are rare, this example underscores the importance of understanding risk transfer. More common issues include water damage or deterioration of cargo en route.

For this reason, it is sometimes said that in CIF and CFR (C&F) contracts, the buyer does not purchase the cargo itself but rather the documents that represent the cargo. Insurance coverage is vital for buyers to protect their interests and mitigate transit-related risks.

Transfer of property ownership

Incoterms do not regulate the transfer of property ownership. Commonly, the transfer of ownership takes place when the buyer pays the purchase price or receives bills of lading. However, the precise point of property ownership transfer can vary, depending on the contract terms.

Need assistance?

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