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A consignment agreement is entered into where one party (the ‘consignor’) supplies goods to another party (the ‘consignee’) for the purpose of selling 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 get a commission when they sell the items. You should consider getting legal advice before entering into a consignment agreement. This article will explain what a consignment agreement is and what it should include.

Why Have a Written Consignment Agreement?

In a consignment arrangement, the consignee acts as an agent for the consignor for the purpose of selling the goods. The goods are supplied 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 the details of your consignment arrangement in writing. Disputes and conflicts often arise in a consignment relationship, particularly if you have not consulted a business lawyer first. Often problems occur because of 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 in a Consignment Agreement?

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

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

  • making sure the agreement accurately reflects your intention;
  • being extremely clear when you write the details of the agreement. Do not assume anything;
  • signing and finalising it before any transactions take place;
  • discussing the agreement with the other party before you write it up; and
  • giving yourself, as well as the other party, plenty of time to consider the agreement before signing it.

Formalities

A consignment agreement will usually start with a section that 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.

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. 

You may also want to include a picture of each item in the agreement or in a schedule or annexure to the agreement. This will make it clear what goods the agreement is referring to and can save a lot of trouble in the long run, particularly if there is a dispute.

Title and Risk 

Your consignment agreement needs to outline the legal title of the goods. That is, that 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 important to ensure that the consignee is responsible for the goods while they are in the consignee’s possession. This will make sure that the consignee takes care of the consignor’s goods in the process. 

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;
  • theft; or 
  • an event that is outside the control of the consignee. 

This provides protection to the consignee but may put the consignor at exposed risk. 

Commission

You need to clearly spell out the commission for each item in the agreement. A percentage amount next to each item with pictures next to them 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.

What If the Items on Consignment Do Not Sell?

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

For instance, this clause should state that if the items do not sell, then they must be returned by the consignee to the consignor, unless the parties agree to extend the term of the consignment. Or alternatively, if the consignor does not pick up the items after 100 days, then they become the property of the consignee.

It is also important 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. 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, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is a consignment agreement?

It is an agreement where one party (the consignor) supplies goods to another party (the consignee) for the purpose of selling those goods. The consignor retains ownership of the goods until they are sold, despite the consignee possessing the goods.

What should a consignment agreement include?

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.

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