A consignment agreement is a legal contract which is signed by two parties – the business owner and the supplier who wants to sell their products via the business.
The agreement generally provides that the business owner does not have to pay for the stock up front and will usually get a commission when the items sell.
You should consider getting online legal advice or speaking with a business lawyer before entering into a consignment agreement. Even if you don’t get legal advice, you should always make sure the consignment agreement is in writing.
Why have a written Consignment Agreement?
Disputes and conflicts often arise in a consignment agreement, particularly if you haven’t consulted a business lawyer first. Often problems occur because of a lack of understanding and genuine confusion over the terms of the agreement. A written agreement reduces the chances of errors and misunderstanding, while clearly outlining each party’s rights and obligations.
How do I write a Consignment Agreement?
There are some good general principles you should follow:
- Make sure the agreement properly reflects your intentions.
- Be extremely clear when you write the details of the agreement, don’t assume anything.
- Have it signed and finalised before any transactions take place.
- Discuss the agreement with the other party before it is written up.
- Give yourself as well as the other party plenty of time to consider the agreement before signing it.
Formalities
You will usually start with a section which identifies the parties to the agreement. 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 normally explain the nature of the transaction and why the parties are entering into a consignment agreement.
The agreement should also state the method of payment.
Multiple copies of the agreement should be made so each party has a copy of it.
Ensure you have contact information of both parties on the agreement.
Liability
The consignment agreement may have a term in it which releases the consignee from liability if the product becomes damaged due to weather, fire or theft. This is good from the consignee’s perspective, but not the consignor’s perspective.
Pictures
Include a picture of each item in the agreement or in a schedule or annexure to the agreement – this will save a lot of trouble in the long-run, particularly if there is a dispute.
Commission
The commission for each item needs to be spelt out – a percentage amount next to each item with pictures next to them is the clearest and safest way to do it. The agreement should also specify any fees or expenses outside of the commission percentage and under what circumstances they should be paid. The agreement also needs to state the procedure when something is sold and how the consignor is notified.
Note: if you charge a commission higher than you agreed, a court may impose a significant penalty on you.
What if the items on consignment don’t sell?
You need to draft this possibility into the agreement. This clause should state that for instance, if the items don’t sell then they must be returned by the consignee to the consignor (unless the parties agree to extend the term of the consignment) or if the consignor doesn’t pick up the items after 100 days then they become property of the consignee, which is the business selling them.
Speak to a business lawyer
Having a well-drafted consignment agreement is crucial to reduce the likelihood of disputes and litigation. You should consider speaking with a business lawyer or getting legal advice online. Alternatively, you should at least consider having a business lawyer look at the agreement online before you sign it.