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Consignment agreements are legal contracts in which one party, referred as consignor, grants legal rights to another party, referred to as consignee, to sell, resell, storage, or transfer goods on the consignor’s behalf.
What is a Consignment Agreement?
A consignment contract, also known as consignment sales agreement or consignment inventory agreement, is an agreement between a seller or a sender, referred to as consignor, and a buyer or a receiver, referred to as consignee, that set out the legal rights and duties of both parties for the storage, transfer, sale or resale and use of goods.
A consignor is the person or entity that owns the good, and the sender or the shipper of the goods to the consignee, in order for the consignee to sell, store, resell, or transfer the goods on behalf of the consignor.
The consignee is the party who receives the goods from the consignor, and is given the right to store the goods in a warehouse, sell or resell the goods on behalf of the consignor, in exchange of a percentage of the sales as agreed on between the parties. Consignee are usually referred to as receivers or dealer.
The consignee is considered a third party that connects the consignor to any potential buyers or purchasers of the goods, since the consignor is the legal owner of the goods, and the consignee’s rights and obligations are set out and limited to what is agreed on in the consignment agreement.
What is “Consignment”?
Consignment is a business arrangement or method in which the consignee agrees to store, sell, resell, or transfer goods that are owned by the consignor, in exchange of a percentage of the sales, called commission. The consignor in this case have the legal ownership of the goods, and the consignee is only acting within the authorized actions that are specified in the consignment agreement.
This method is usually taken by businesses who want to test the demands of the market by storing their merchandises in the consignee’s warehouse do the consignee sell the merchandises to customers, and transfer the payment to the consignor after deducting the commission fees that is specified in the consignment agreement.
When preparing a consignment agreement, keep in mind that the agreement should specify the rate of commission, sales deadline, and the consequences in the event of no sale, as these information are the key elements of the consignment agreement so it can be clear for both parties. adding a number of optional paragraphs in a consignment agreement to fit any other preferred requirements is recommended.
What to Include in the Consignment Agreement?
Introduction of Parties
As any other legal document, Identifying the parties and the date of the agreement is mandatory. the party that is providing the goods or merchandise should be referred to as “Consignor.” The party that is selling the goods or merchandise should be referred to as “Consignee.”, as these names will be used throughout the agreement.
This section deals with describing the goods, merchandise, items that will be sold by the Consignee on behalf of the Consignor, and how many units of each item will be provided by the consignor. For example, factory codes, serial numbers, model and style numbers, or any other information related to the goods can be included in this section, along with the initial retail price for each listed item and the date on which those goods will be delivered to the consignee.
Delivery of Goods
This section of the consignment agreement state that the goods are being provided on a consignment basis only, and explain that the Consignor bears both the cost of delivering the products and the risk of any loss or damage occurring during that transport to the consignee.
Both parties should agree on the initial length or period of time of the consignment, and if this period automatically extends for another period, unless either party ends it.
Efforts to Sell
This section should include any responsibilities that consignee will bear in order to have the maximum profit of the sale of goods. For example, stating consignee’s effort of allowing items to sit in its store, promoting the sale of the items by giving them proper positioning and attention. This section provides that the Consignee’s obligations and reasonable efforts that goes beyond simply keeping the products in its store.
Title to Products
Since the consignment arrangement is a unique method that treat the consignee as a third person that connect the seller and the buyer, by transferring goods to the consignee without transferring the legal ownership to the consignee. This section emphasizes that the parties to the agreement are entering into a consignment arrangement, which declares the legal ownership to the consignor, and the legal rights and obligations of the consignee that helps in selling the goods.
Payment and Commission
Since the consignment arrangement deals with selling good through the consignee as a third party, the agreement should include a section or several clauses that indicate what percentage of the sale will be kept by the Consignee as a “fee” for its services.
Risk of Loss/Damage
This section states the consignor’s responsibility in maintaining and protecting the products while they are in its possession, which means that if any property is damaged during that time, the Consignor must compensate the Consignee for that loss.
Return of Products
During the consignment process, the Consignor may request the consignee a return of its products by giving the consignee a notice. This section set out how the consignor give a notice to the consignee, and how long the notice period should be. In addition, after the end of the consignment term, the Consignee can demand that the Consignor retrieve its products, which needs to be determined and the time frame of its period as well.
This section of the consignment agreement explains how the parties of this agreement can end the agreement at any time for any reason. If the parties do decide to end the agreement, then this section should indicate when and how any unsold products should be returned, and the amount of time the Consignee has to return the property after the agreement ends.
This section states that neither party can transfer its obligations under the agreement without the prior written consent of the other party.
No Product Warranties
The consignment agreement should include an indication that there are no warranties on the consigned products, except to the extent required by law for example.
Governing Law and Equitable Relief
This section deals with the procedures that will be taken by both parties when conflicts or disputes arise. It allows the parties to choose the state and county laws that will be used to interpret the agreement. This section also allows the parties to seek equitable relief. For instance, any court remedies requiring a party to perform or refrain from performing certain acts for any violation of the agreement.
- Description of Consigned Goods/Items
- Delivery of Goods
- Efforts to Sell Consigned Items
- Consignment Period
- Consignee’s Efforts to Sell
- Title to Products
- Payment and Commission
- Risk of Loss/Damage
- Return of Products
- “No Assignment” Clause
- “No Product Warranties” Clause
- Governing Law