Key Takeaways

  • A consignment agreement allows one party (consignee) to sell goods on behalf of another (consignor) without upfront purchase.
  • Common industries using consignment include art, fashion, furniture, and niche retail.
  • Legal protections in consignment agreements ensure inventory, ownership, and revenue splits are clearly defined.
  • The agreement should address liability, payment terms, unsold inventory, termination, and dispute resolution.
  • Uniform Commercial Code (UCC) and proper documentation (e.g., UCC-1 filings) protect consignors' ownership rights.
  • A detailed consignment agreement can help both parties reduce risk and maximize profitability.

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.

Common Use Cases for Consignment Agreements

Consignment agreements are widely used in industries where selling on speculation is common. Examples include:

  • Art Galleries: Artists consign artwork to galleries, which display and sell pieces on their behalf.
  • Fashion Retailers: Boutique stores often use consignment to stock unique clothing or accessories without upfront investment.
  • Furniture and Home Decor Stores: Larger items that may not sell quickly are consigned to minimize financial risk.
  • Books and Publications: Independent authors or publishers may use consignment to place books in local shops.
  • Niche Retail Products: Local food items, handmade goods, or seasonal items are often sold via consignment to test market demand.

These arrangements benefit consignors by expanding market reach and benefit consignees by minimizing inventory risk.

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.

Key Legal Considerations in a Consignment Agreement

A comprehensive consignment agreement must address several legal issues to protect both parties:

  • Ownership of Goods: The agreement should clarify that the consignor retains ownership until the item is sold.
  • UCC Filings: Filing a UCC-1 Financing Statement may be necessary to protect the consignor's claim against third-party creditors in the event of the consignee’s bankruptcy.
  • Insurance Requirements: Clearly state which party is responsible for insuring the goods while they are in the consignee’s possession.
  • Risk of Loss or Damage: Define which party bears responsibility for damage or theft.
  • Jurisdiction and Governing Law: Include a clause specifying which state's laws govern the agreement.
  • Termination Clause: Outline how and when either party may terminate the agreement and the procedure for returning unsold goods.

Proper legal language ensures enforceability and protects against liability or misinterpretation.

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.

Common Mistakes to Avoid in a Consignment Agreement

Avoid these pitfalls when drafting or entering a consignment agreement:

  • Vague or Missing Terms: Lack of detail around commission rates, payment timelines, or inventory tracking can cause disputes.
  • Failing to Document Ownership: If a consignee goes bankrupt and no formal agreement or UCC filing exists, the consignor could lose their goods.
  • Ignoring State Laws: Some jurisdictions require consignment agreements to meet specific legal standards to be valid.
  • Not Including Marketing Responsibilities: Clearly outline whether the consignee must actively promote the goods and what methods are acceptable.
  • Improper Inventory Management: Without clear tracking procedures, either party may misunderstand what’s been sold or what remains.
  • Skipping Insurance Coverage: If neither party insures the goods, a loss event could lead to irrecoverable damages.

To reduce legal and financial risks, each party should consult an attorney to review the agreement before signing.

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

Essential Clauses to Include in a Consignment Agreement

Every well-drafted consignment agreement should include the following clauses:

  1. Definition of Goods: A detailed list describing the consigned items, including SKUs, quantities, and retail pricing.
  2. Term of Agreement: The duration of the agreement, including any automatic renewal or extension terms.
  3. Payment Terms: When and how the consignee will pay the consignor for sold goods—e.g., net 30 days after sale.
  4. Commission Structure: Whether based on a percentage of sales or flat fee per item, and if minimum sales thresholds apply.
  5. Sales Reporting: Frequency and format of reports from the consignee on sales, returns, and inventory status.
  6. Handling of Unsold Goods: Options for returning, discounting, or disposing of unsold merchandise.
  7. Marketing and Display: Any obligations regarding product placement, signage, or promotional activity.
  8. Default and Remedies: Consequences for non-performance or breach, including dispute resolution processes.

These provisions help both parties stay aligned and reduce the chance of costly misunderstandings.

Frequently Asked Questions

  1. What is a consignment agreement used for?
    A consignment agreement allows one party to sell goods on behalf of another without requiring an upfront purchase, making it useful in retail, art, fashion, and more.
  2. Who owns the goods in a consignment arrangement?
    The consignor retains ownership until the goods are sold. The consignee acts as an agent for the sale.
  3. What happens to unsold goods?
    Terms for handling unsold items should be outlined in the agreement, typically including return, disposal, or discount options.
  4. Is a consignment agreement legally binding?
    Yes, when properly drafted, signed, and executed, a consignment agreement is a legally binding contract enforceable in court.
  5. Can I create a consignment agreement without a lawyer?
    While templates exist, it's best to consult a business attorney to tailor the agreement to your specific situation. You can find a qualified attorney on UpCounsel.

If you need help with consignment contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.