Key Takeaways

  • A consignment agreement allows one party (the consignee) to sell goods owned by another (the consignor).
  • The consignor retains ownership until the item is sold.
  • Agreements should define commission structures, consignment periods, and quality standards.
  • Return, risk, insurance, and legal jurisdiction clauses can help prevent disputes.
  • Businesses benefit from consignment by reducing inventory risk and costs.

Consignment store contracts, also known as consignment inventory agreements or consignment sales agreements, are legal agreements in which one party grants legal rights from another party to sell merchandise on its behalf. The consignment process entails sending merchandise from a consignor to a consignee. The consignee is responsible for then selling the merchandise to an independent third party. The consignor continues to retain ownership of the goods until the sale occurs.

Who Is the Consignor?

The consignor is the individual who owns the goods. The consignor is often someone looking to quickly flip the goods and make a profit.

Who Is the Consignee?

The consignee is the individual who is allowed to sell the goods on behalf of the consignor. Often the consignee is a business or storefront that operates solely for the purpose of selling the consigned goods. Most of the time these organizations are known as consignment shops.

When Is a Consignment Agreement Applicable?

A consignment agreement should be created when one party is selling goods for another party. It is a good way to document the terms for selling goods through another party. Consignment agreements outline the procedure for the sale of merchandise. Generally, the consignee will receive a specified percentage of sales as a commission.

Consignment agreements specify the rate of commission, sales deadline, and the consequences in the event that a sale doesn't occur. For example, the contract could stipulate that the consignment store donate unsold merchandise to a nonprofit organization.

Additional optional paragraphs may be added to the consignment agreement to fit the requirements of a negotiation. An attorney should be consulted in cases where there are unusual circumstances.

Key Benefits of a Consignment Agreement

Consignment agreements offer mutual advantages for both consignors and consignees. For consignors, they provide access to new markets and sales channels without the upfront cost of running a storefront. This is especially useful for small businesses or individual creators. For consignees, such as retail stores, the agreement reduces inventory risk since payment is only made when the item sells.

Additional benefits include:

  • Reduced capital investment for consignees.
  • Increased product diversity in stores without purchasing inventory.
  • Flexibility for both parties in setting prices and negotiating sale terms.
  • Trial market exposure for new products before committing to wholesale arrangements.

What Should be Covered in a Consignment Store Contract?

The most significant components of a consignment contract are:

  • Contact information: The first page of the contract should identify the consignment store's contact information. This information is typically the:
    • Store owner's (consignee's) name.
    • Store's address and telephone number.
    • Consignor's name, email address, and telephone number.
    • In cases where the store has numerous consignment split options, adding a section to identify the selected consignment split is also recommended.
  • Consignment merchandise specifications: All consignment contracts should declare the condition and types of admissible merchandise. For example, a men's clothing consignment store may only accept suits, dress shirts, and ties that are less than two years old, with no missing buttons, and no stains or other irregularities. A furnishing consignment store may only accept furniture that's less than three years old, with no structural or cosmetic defects such as cracked or chipped chair legs. It's also recommended that the contract include terminology that allows the store to reject merchandise that doesn't meet the quality control guidelines.
  • Pricing: This section of the contract will establish that the store will set its own pricing based on the merchandise it receives. The store should describe how the pricing will be created based on the following attributes:
    • Age.
    • Brand.
    • Condition.
    • Market demand.
    • Style.
  • Consignment terms: The length or period for which the consignment store will attempt to sell the merchandise should also be included. Often this is driven by the store's climate or location. For example, a New York men's clothing consignment shop may operate on a short 120-day summer clothing season, replacing tank tops and shorts when the weather begins to cool down. Also, it's important that the contract clearly states that the store's employees will make all final pricing arrangements, and it should identify the schedule for marking down merchandise.
  • Payment structure: A well-drafted contract will identify the exact percentage of commission that the store and consignee will receive based on the sale of merchandise. It's quite common for the store owner and consignee to evenly split the commission. In other cases, the store owner may elect to retain 70 percent of each sale's revenue, while paying the consignee 30 percent. Other stores may select the opposite approach, forwarding 70 percent to the consignee while the consignor nets the remaining 30 percent. In cases where the merchandise sells at a decreased sale price, the contract should address whether the commission will be split based on the sale price or the original price.

Additional Legal Provisions to Include

Beyond the basic structure of commission and merchandise terms, a comprehensive consignment agreement should include additional clauses to mitigate legal and financial risks:

  • Title and Ownership Clause: This should reaffirm that the consignor retains ownership of the merchandise until a sale occurs.
  • Risk of Loss: Clarify who bears the responsibility in case the item is damaged, lost, or stolen while in the consignee’s possession.
  • Return Policy: Establish what happens to unsold goods. Will they be returned, discounted, or donated?
  • Termination Clause: Outline the conditions under which either party can end the agreement and the process for returning or disposing of inventory.
  • Dispute Resolution: Specify whether arbitration, mediation, or litigation will be used if conflicts arise.
  • Insurance Requirements: The agreement may require the consignee to maintain insurance coverage for the consigned items.
  • Jurisdiction and Governing Law: Clearly indicate which state’s laws will govern the agreement and where disputes will be handled.

Consignment Agreement Tips for Businesses

To get the most out of a consignment relationship, businesses should:

  • Use inventory tracking systems to monitor the status of consigned items.
  • Maintain accurate records of sales, markdowns, and payment schedules.
  • Schedule periodic reviews to assess which products perform best on consignment.
  • Communicate proactively about seasonal changes, product turnover, and customer preferences.
  • Train staff to understand how consignment differs from owned inventory to ensure consistent pricing and handling.

Frequently Asked Questions

  1. What happens if a consigned item doesn't sell?
    The consignment agreement should specify what to do with unsold inventory. Common options include returning the item to the consignor, donating it, or allowing the consignee to apply markdowns.
  2. Who is responsible for damaged goods?
    Responsibility for damage is typically addressed in the agreement. Many contracts assign liability to the consignee during the consignment period, especially if negligence can be shown.
  3. Can the consignor set the sale price?
    Usually, the consignee has discretion to set the final sale price, but the agreement may outline a pricing strategy or minimum sale threshold.
  4. Is a consignment agreement legally binding?
    Yes, when properly executed, a consignment agreement is a legally binding contract. It is recommended to include signatures, dates, and clear terms to ensure enforceability.
  5. Can consignment agreements be used for digital goods?
    While most consignment deals involve physical items, consignment-style models can be used in digital marketplaces, though they may require unique licensing and intellectual property terms.

If you need help with consignment store 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.