FOB, CFR and CIF: Who Charters the Ship
In a sale of commodities by sea the delivery term decides who has to find and pay for the ship. This guide shows what FOB, CFR and CIF mean for the charterer.
The three terms
FOB (Free On Board): the seller delivers the cargo on board the ship at the loading port. The buyer arranges and pays the ship and takes the risk from the moment the cargo is loaded. CFR (Cost and Freight): the seller pays the sea freight to the discharging port, but the buyer carries the risk from loading. CIF (Cost, Insurance and Freight): as CFR, and the seller also buys the insurance. The terms are published by the International Chamber of Commerce as part of the Incoterms rules.
What it means for chartering
Under FOB the buyer is the charterer: the buyer finds the ship, charters it and tells the seller which ship to expect. Under CFR and CIF the seller is the charterer and chooses the ship. In both cases the sale contract and the charter party must fit together: the loading dates, the ports, the loading rates and the rules for delay.
Matching the sale and the charter
Problems often come from a gap between the two contracts. The sale contract may allow 5 days of loading, while the charter party allows 3. The buyer must nominate the ship in time under an FOB sale. The cargo quality is checked at loading in many sales, and the ship must be ready at the same time. Delays are paid under the demurrage terms, so check who pays them in each contract.
Choosing the ship for your term
A buyer on FOB terms often chooses the ship size to match the port and the cargo, for example Supramax for fertilizers or Panamax for grain. A seller on CIF terms must make sure the ship can discharge at the destination. See the cargo guides for grain and fertilizer and coal and ores.
Practical tips
Write the Incoterm in the request so that ship operators understand who is the charterer. Give the loading and discharging dates and the rate you can reach. Keep the documents together: the sale contract, the charter party, the bill of lading and the inspection certificates. For high-value deals, a lawyer should review both contracts.
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