What is a Consignment Agreement?

In Short

A consignment agreement allows a business to supply goods to another party to sell while retaining ownership until sale. A written agreement reduces disputes by clearly setting out responsibilities, commission, delivery terms and risk allocation. Businesses must ensure the contract does not contain unfair terms, which may be unenforceable and attract penalties.

Tips for Businesses

Put all consignment arrangements in writing before supplying goods. Clearly identify the goods, pricing, commission and who bears risk while items are held or returned. Address unsold stock, delivery costs and liability events. Review terms for unfair contract risks and ensure both parties understand obligations before signing.

Summary

This article explains consignment agreements for businesses supplying or selling goods on consignment in Australia. It is prepared by LegalVision’s business lawyers, and LegalVision, a commercial law firm, specialises in advising clients on commercial contracts.

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On this page

• Advantages of a Consignment Arrangement
• Written Consignment Agreement
• What to Include
• Unsold Items on Consignment
• Key Takeaways 
• Frequently Asked Questions

As a party giving or receiving goods on consignment, it is essential that you draft a robust consignment agreement to protect your commercial interests. A consignment agreement is where one party (the ‘consignor’) supplies goods to another party (the ‘consignee’) to sell those goods. The consignor will retain ownership of the goods until the consignee sells them despite possessing the goods. 

Furthermore, the agreement generally provides that the consignee does not have to pay for the stock upfront and will usually receive a commission when they sell the items. You should consider obtaining legal advice before entering into a consignment agreement. This article will explain what a consignment agreement is and what it should include.

Advantages of a Consignment Arrangement

A consignment arrangement allows the consignor to attract additional exposure to their brand and their goods. Furthermore, it is a good opportunity to target different markets without investing in marketing. It is also an attractive alternative to storing the goods in a warehouse or storage facility. 

Written Consignment Agreement

In a consignment arrangement, the consignee acts as an agent for the consignor to sell the goods. The supplier provides the goods to the consignee, but the consignee does not become the owner of the goods. Instead, the consignor retains ownership of the goods until the consignee sells them to the consumer, who then becomes the owner of the goods. As the consignee is not the owner of the goods, they may request the return of the goods to them at any time, subject to the terms of the consignment agreement.  

It is important to have your consignment arrangement in writing. Disputes and conflicts often arise in a consignment relationship, particularly if you do not consult a business lawyer first. Often, problems arise from a lack of understanding and genuine confusion over the arrangement. Therefore, a written consignment agreement reduces the chances of errors and misunderstandings while clearly outlining each party’s rights and obligations.

What to Include

Your consignment agreement should establish the relationship between the consignor and the consignee. Additionally, it should specify the procedure for the sale of goods and attempt to mitigate any risk of disputes.

Some general principles you should follow when drafting a consignment agreement include:

• ensure the agreement reflects your intention;
• clearly articulate the details of the agreement;
• sign and finalise it before any transactions take place, as the terms of the consignment agreement may not apply to any pre-contractual negotiations;
• discuss and negotiate the contract with the other party before drafting; and
• give both parties plenty of time to consider the agreement before signing it.

Some points to consider include the following: 

• whether you will deliver the goods to the consignee, or whether they will collect them from you;
• the frequency for the supply of goods, for example, whether you will supply a predetermined amount of goods at the end of each month regularly or whether the consignee needs to issue order requests on a needs basis;
• specifying a minimum order requirement; and
• determining responsibility for the cost of delivering or collecting the goods.

Formalities

A consignment agreement will usually start with a section identifying the parties to the contract. The consignor is the person providing the goods, while the consignee is the person who takes possession of and sells the goods. In the ‘recitals’ section, the agreement will typically explain the nature of the transaction and why the parties are entering into a consignment agreement.

Consigned Goods 

Your consignment agreement should include specific details of the consigned goods, including: 

• any specific model numbers; 
• any serial numbers; 
• how many units of each item you will provide; and 
• the retail sale price. 

Your consignment agreement needs to outline the legal title of the goods. That is, specifying the consignor will retain ownership of the goods until the consignee sells the goods to the consumer or a third party. Although the consignor retains ownership of the goods, it is vital to ensure that the consignee is responsible for the goods while they are in the consignee’s possession. Specifying this responsibility will ensure that the consignee takes care of the consignor’s goods in the process. 

Liability

The consignment agreement may include a term that releases the consignee from liability if the following causes damage to the product: 

• weather; 
• fire;
• theft; or 
• an event outside the consignee’s control. 

This protects the consignee but may put the consignor at risk. 

Commission

You need to clearly spell out the commission for each item in the agreement. A percentage amount for each item with an accompanying picture is the clearest and safest way to do it. The agreement should specify any fees or expenses outside of the commission percentage and under what circumstances the consignee must pay them. Further, it should state the procedure once the consignee sells an item and how they will notify the consignor.

Unsold Items on Consignment

It is essential to include this scenario in your consignment agreement so that if the items on consignment do not sell, it is clear what the parties are to do.

For instance, this clause may state that if the items do not sell, then the consignee must return them to the consignor unless the parties agree to extend the term of the consignment. Alternatively, if the consignor does not pick up the items after 100 days, they become the consignee’s property.

It is also essential to determine who will bear the costs of returning items that do not sell. 

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Key Takeaways 

A consignment arrangement can be a great way to engage a business to advertise and sell your goods. Therefore, it is crucial to have a well-drafted consignment agreement in place to reduce the likelihood of disputes and litigation arising. 

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Frequently Asked Questions