FOB and CIF
In any sale of a commodity there is a seller and a buyer. There are effectively two ways of selling any cargo by sea:
1- FOB (Free on Board) – the owner of the cargo brings the cargo to the quay and loads it on to the vessel at his expense. When the cargo is on board (ie ‘over the ship’s rail’ but in practical terms loaded in the hold), the title (ownership) of the goods transfers to the buyer. In this case, the FOB seller will be ‘free’ of any liability or risk after he has placed the goods on board, so he will not be responsible for chartering the carrying vessel – the buyer will be the charterer at his risk.
2- CFR (Cost and Freight) or CIF (Cost, Insurance and Freight) – the owner of the cargo not only brings the cargo to the quay and loads it onto the vessel at his expense but will also charter the carrying vessel and pay for the freight. He may also pay for the premium for insurance of the cargo at sea and the insurance of the sea freight. In other words, the owner (seller) of the cargo will charge his buyer the cost of cargo, the amount of the insurance premium to cover an insurance policy for damage to or loss of that cargo during its carriage and the cost of that carriage, payment of which is known as Freight. In this case, the seller of the cargo will perform the chartering at his risk.