Incoterms® 2020, published by the International Chamber of Commerce, define who does what between seller and buyer in an international sale. In bulk commodities, three rules dominate: FOB, CFR and CIF. All three are designed for sea and inland waterway transport, and choosing between them is one of the first commercial decisions in any trade.
The one thing they have in common
It surprises many first-time buyers: under all three rules, risk transfers when the goods are loaded on board the vessel at the port of shipment. If cargo is damaged during the voyage, it is the buyer's risk under CFR and CIF just as much as under FOB — even though the seller arranged the ship.
That is why buyers on CFR and CIF terms still need to think about insurance, vessel quality and the seller's choice of carrier.
FOB — Free On Board
The seller delivers the goods on board a vessel nominated by the buyer at the named port of shipment.
- The buyer charters the vessel, pays freight and arranges insurance.
- The seller handles export clearance and loading costs (unless the contract says otherwise).
- Watch out for coordination risk: the buyer's vessel must arrive within the agreed laycan, and delays at the load port are a classic source of demurrage disputes.
FOB suits buyers with their own chartering capability or freight relationships, and sellers who prefer not to take on freight exposure.
CFR — Cost and Freight
The seller arranges and pays for carriage to the named destination port, but risk still passes at loading.
- The seller charters the vessel and pays freight.
- The buyer carries risk from loading and arranges its own insurance.
- Watch out for limited control over the vessel and voyage — the buyer should agree minimum vessel standards and notice obligations in the contract.
CIF — Cost, Insurance and Freight
As CFR, plus the seller must buy cargo insurance for the buyer's benefit.
- Under Incoterms 2020, the required cover for CIF is the minimum level — Institute Cargo Clauses (C) — for at least 110% of the contract value.
- Watch out for the gap between minimum and adequate cover. Many buyers negotiate broader "all risks" cover (Institute Cargo Clauses (A)) or insure the difference themselves.
Quick comparison
- Who books the ship? FOB: buyer · CFR: seller · CIF: seller
- Who pays freight? FOB: buyer · CFR: seller · CIF: seller
- Who buys insurance? FOB: buyer · CFR: buyer · CIF: seller (minimum cover)
- When does risk pass? All three: on board at the port of loading
Containers are a different case
FOB, CFR and CIF were built for goods loaded directly on board, as with bulk grain or oils in tankers. For containerized cargo, which is handed to a carrier at a terminal before loading, the ICC recommends the "any mode" equivalents: FCA, CPT and CIP. Using FOB for containers leaves the seller carrying risk for goods it no longer controls.
What Incoterms don't cover
Incoterms say nothing about the price, when title transfers, payment terms or which law governs the contract. Those must be set out in the sale contract itself. Note too that trade-association contracts used in grains and oils define their own delivery terms; the contract should make clear which definitions prevail.
Need a second opinion?
Our desk structures trades on FOB, CFR and CIF terms every week across the Black Sea, the Gulf, Africa and Asia. If you are weighing up terms for your next purchase, talk to our trading desk.
