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 they are sold, despite the consignee 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.
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 will retain 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 will be able to have the goods returned 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.
Continue reading this article below the formWhat 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.
Your consignment agreement should also detail how and when you will deliver the goods to the consignee.
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.
You must ensure that your consignment agreement does not include any ‘unfair contract terms’. Suppose such terms are in your consignment agreement, and they are not reasonably necessary to protect your legitimate interests. In that case, the unfair terms can be void and unenforceable, and you may face penalties.
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 agreed retail sale price.
Title and Risk
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 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 have a term in it that releases the consignee from liability if the product becomes damaged due to the following:
- 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 they should be paid. Further, it should state the procedure once an item is sold and how the consignor is notified.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
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.
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.
For assistance with drafting or reviewing your consignment agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
It is an agreement where one party (the consignor) supplies goods to another party (the consignee) to sell those goods. The consignor retains ownership of the goods until they sell, despite the consignee possessing them.
It set out the entire relationship between the consignor and the consignee. It should outline the formalities, details of the consigned goods, the title of the goods and risk, circumstances that release the consignee from liability, the commission and what happens if the goods do not sell.
We appreciate your feedback – your submission has been successfully received.
