Consignment Contracts: Everything You Need to Know
Consignment contracts, or consignment inventory agreements, are legal agreements in which one party grants legal rights to another party to sell merchandise on its behalf.4 min read
2. Consignment Agreement Overview
3. Do's and Don'ts Checklist
4. Consignment Agreement Instructions
Updated November 3, 2020:
Consignment contracts, or consignment inventory agreements, are legal agreements in which one party grants legal rights to another party to sell merchandise on its behalf.
Consignment Agreement Basics
If you want to sell something through others, a consignment agreement is a good way to put down the terms in writing. A consignment agreement specifies the procedure for the sale of merchandise through others.
You should execute a consignment agreement if you are selling goods for someone else. Usually, the consignee gets a specified percentage of sales as a commission.
A consignment agreement specifies the rate of commission, sales deadline, and the consequences in the event of no sale. You can add a number of optional paragraphs in a consignment agreement to fit your requirements. If there are unusual circumstances in your case, you should consult an attorney.
A consignment contract is also known as consignment sales agreement or consignment inventory agreement.
Consignment Agreement Overview
There are various reasons for businesses to go for consignment arrangements. Retail outlets may use this model to understand the demand for a new product in the market.
A consignment arrangement allows these outlets to sell goods without having to purchase them, which may require a significant initial investment. The outlets need to pay for the consigned goods only when they are sold.
Artists, creators, and manufacturers who are confident about the sales of their goods may be willing to take the initial risk for the consignee. Manufacturers can mitigate their risk to some extent by requiring the retail outlets to invest in promoting and marketing the goods.
Execution of a consignment contract allows each party to focus on its expertise. The manufacturer can focus on producing or creating, while the retailer can focus on selling. A consignment contract thus promotes the division of labor and a profitable business arrangement.
Consignment arrangements can thus be profitable for both parties. However, it's advisable for both sides to maintain proper paperwork to protect their individual interests.
A good consignment agreement includes provisions for inventory control and clearly spells out the rights and responsibilities of both parties. A written agreement goes a long way in minimizing confusion and misunderstandings. It helps the parties understand the expectations and obligations arising out of the arrangement.
Do's and Don'ts Checklist
- Hold detailed discussions about the goods or items involved.
- Before you put down the agreement in writing, be clear about your goals.
- Make sure your intentions are accurately manifested in the contract.
- Discuss and clarify terms and conditions of the agreement before formalizing them in writing.
- If you find anything unclear or confusing in the agreement, make it clear and unambiguous.
- Taking out time to draft your agreement well can save you from weeks of headache.
- Each party should get an opportunity to review the agreement. This will reduce the chances of a claim from either party that it did not understand the terms of the agreement.
- Review the agreement carefully to ensure that all essential points are included.
- It's better to err on the side of over-inclusion rather than on the side of under-inclusion.
- Never assume anything. Put down all your expectations and terms expressly in the agreement.
- Be sure to have the contract signed before performing any services, exchanging goods, transferring money, or carrying out any other transaction.
- Always have two signed copies of the agreement so that each party can keep one.
- Depending upon the terms of the agreement, you may want to have it witnessed or notarized. This will reduce the chances of challenging the validity of a signature on the document.
- Proper record-keeping is essential for a successful consignment agreement.
- The manufacturer or the supplying party should send an inventory sheet along with each delivery and update it with payment summaries and the total number of items delivered.
- Good recordkeeping reduces the instances of disagreement and litigation.
- It's always better to have an attorney draft a contract for you.
- Do not use consignment contracts in situations where the deal or agreement is complicated.
Consignment Agreement Instructions
When drafting your consignment agreement, be sure to include the following sections:
- Introduction of parties and date of the agreement
- Explanation of why the parties are entering into the agreement
- Details of the consigned property, including model, serial numbers, factory codes, agreed retail prices, and dates of delivery
- A delivery clause, usually stating that the goods are provided on the consignment basis and that the consignor agrees to bear the delivery cost as well as any loss or damage that might take place during the course of transport
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