We Use Incoterms® 2010 Rules, Common Shipping Terms. We supports the international import and export guidelines and universal shipping terms laid out in the International Chamber of Commerce’s (ICC) Incoterms rules. To get acquainted with Incoterms, you can visit the main site in here.
Free On Board (F.O.B)
In ocean freight, the FOB Incoterm, or “Free on Board”, is an Incoterm that’s exclusive to ocean freight shipping. It states that the seller must load the goods onto the ship chosen by the buyer.
The seller is also responsible for all costs and risks up until all goods are loaded on board the vessel, at which point the risks are transferred to the buyer.
The FOB Incoterm is similar to the FCA Incoterm, the only difference being the risk transfer point upon complete loading of goods is not specifically mentioned in the FCA Incoterm. As such, unlike FCA, FOB is not recommended for shipping containerized cargo.
Obligations in F.O.B incoterms
Insurance coverage isn’t mandatory under the FOB Incoterm. However, it is common practice to obtain insurance. This may be done by the buyer, seller, or both, to cover the entire ocean freight journey or their respective responsibilities.
Make sure cargo insurance terms are clearly defined and specified in your sales contract to avoid problems.
FOB unsuited for containerized cargo
While it is very common to see FOB being used for containerized imports (especially from China), note that this is an incorrect Incoterm to use for containerized shipments.
Under FOB, risk is only transferred from the buyer to the seller when the goods are loaded onto the shipping vessel. This makes it inappropriate for containerized cargo, which is often dropped off at container terminals days prior to loading.
This creates a grey area during which the merchandise within the container could be damaged, whether it is sitting at the container or during transportation or loading. Since the cargo remains enclosed within the container until arrival and pickup, in the event of damages, it makes it difficult to pinpoint the exact moment the damage occurred and identify the party liable.
That said, when shipping containerized cargo, be it from China or anywhere else in the world, FCA is the suggested alternative to FOB.
Cost and Freight (C.F.R)
The CFR Incoterm or “Cost and Freight” is an Incoterm that is exclusive to ocean freight shipping.
It states that the seller is not only responsible for delivering the goods to the port specified by the buyer, but also bears the transportation costs of the goods to the destination port.
CFR is nearly identical to CIF, the only difference is that insurance is mandatory under CIF and must be provided by the seller. With CFR, however, insurance is optional.
Common practice dictates that CFR should be chosen over CIF if the buyer is able to acquire better or more affordable insurance and vice versa.
Obligations in C.F.R incoterms
Even though Incoterms laws do not mandate for cargo insurance to be provided under CFR, it is recommended for international ocean freight shipments to be shipped insured.
The shipments may be covered entirely by one single policy obtained by the buyer or seller, or by two separate insurance policies taken out by both the buyer and seller to cover their respective responsibilities.
Make sure that insurance terms and conditions are clearly defined and specified when negotiating your sales contract.
CFR unsuited for containerized cargo
Unlike many of the other Incoterms, the risk transfer point of the CFR Incoterm differs from the cost transfer point. With CFR, risk is transferred when the goods are loaded on board the shipping vessel at origin.
It should only be used in situations where the seller has direct access to the vessel such as bulk cargo shipping when goods are loaded directly onto the vessel instead of dropped off in a container at a terminal prior to loading. As such, the CFR Incoterm is not suitable for containerized cargo.
Insurance and Freight (C.I.F)
Incoterms 2010 dictates that the CIF Incoterm, or “Cost, Insurance and Freight”, is exclusive to maritime shipping. Under CIF, the seller is responsible for the cost and freight of bringing the goods to the port of destination specified by the buyer.
CIF risk transfer takes place when the merchandise is loaded onto the shipping vessel and is recommended for situations in which the seller is able to access the vessel directly, such as in the case of bulk cargo shipping. This makes CIF unsuitable for containerized cargo.
Obligations in C.I.F incoterms
Under CIF, the seller is contractually obliged to provide insurance for the transport of the goods. Together with CIP, these are the only two Incoterms that stipulates that insurance must be provided by the seller.
In common practice, the CFR Incoterm is often preferred by buyers if they are able to secure better cargo insurance coverages. This is because unlike CIF, insurance isn’t a seller’s obligation under CFR and can also be acquired by the buyer.
CIF unsuited for containerized cargo
Unlike some other Incoterms, the risk transfer point of the CIF Incoterm is not the same point as the cost transfer point. With CIF, risk is transferred only when the goods are loaded on board the ship at origin.
This makes CIF unsuitable for containerized cargo, which is usually dropped off at terminal days prior to loading. This creates a grey area during which cargo could unknowingly suffer damages.
Given the nature of containerized cargo, which remains unopened until destination, it would be nearly impossible to know when merchandise gets damaged in the event that it does. When dealing with containerized cargo, CIP is the recommended alternative to CIF.