How to make a consignment agreement?

A consignment agreement is a vital contract that allows one party to sell goods on behalf of another, with the seller only paying for the items after they are sold. To make a consignment agreement, you need to clearly define the terms of the arrangement between the owner of the goods (the consignor) and the seller (the consignee), ensuring all essential provisions are thoroughly outlined.

Understanding a Consignment Agreement

A consignment agreement is a specialized form of contract where the consignor provides goods to the consignee for sale, but crucially, the consignor retains ownership of those goods until they are sold to a third-party buyer. This arrangement benefits both parties: the consignor gains access to a broader market without the need for their own retail space, and the consignee can stock inventory without upfront purchase costs, reducing financial risk.

Essential Provisions for a Consignment Agreement

A well-drafted consignment agreement should cover all key aspects of the relationship and transaction. Here are the fundamental components to include:

Parties Involved

Clearly identify the full legal names, addresses, and contact information for both the consignor and the consignee. This ensures there is no ambiguity about who is bound by the agreement.

Description of Goods

Provide a detailed and accurate description of the item(s) being consigned. This can include:

• Quantity of items
• Type of goods (e.g., artwork, clothing, electronics)
• Specific identifiers (e.g., model numbers, serial numbers, unique markings)
• Condition of the items

Pricing Structure

Define how the selling price of the consigned items will be determined. This section should specify:

• Whether the consignor sets the final retail price.
• If there's a minimum acceptable price.
• How discounts or promotional sales will be handled and approved.

Payment Terms

This is a critical section that outlines the financial arrangement. It must clearly state:

• The commission rate or fee the consignee will receive for each sale (e.g., a percentage of the selling price, a fixed fee).
• The schedule for payment to the consignor (e.g., within a certain number of days after sale, monthly, quarterly).
• How sales proceeds will be reconciled and remitted.

Expenses and Costs

Specify which party is responsible for various costs associated with the goods. This might include:

• Shipping or delivery costs to and from the consignee's location.
• Storage fees.
• Marketing or advertising expenses.
• Costs for cleaning, repair, or refurbishment of items.

Record-Keeping and Reporting

Establish clear expectations for how sales and inventory will be tracked and reported. This typically includes:

• The type of records the consignee must maintain (e.g., sales receipts, inventory logs).
• The frequency and format of reports to the consignor (e.g., weekly sales reports, monthly inventory statements).
• Provisions for auditing or inspection of records by the consignor.

Ownership and Title

Explicitly state that the consignor retains full ownership and title to the goods until they are sold to a third-party buyer. This is a fundamental characteristic of consignment and differentiates it from a purchase-sale agreement.

Insurance and Liability

Determine which party is responsible for insuring the goods against loss, damage, or theft while they are in the consignee's possession or transit. This provision protects both parties from unforeseen circumstances and financial losses.

Term and Termination

Outline the duration of the agreement (e.g., fixed period, ongoing until terminated) and the conditions under which either party can terminate it. This should include:

• Required notice period for termination.
• Conditions for termination due to breach of contract.
• What happens to unsold inventory upon termination.

Return of Unsold Goods

Define the process for returning any items that do not sell within the agreed-upon consignment period or upon termination of the agreement. Specify who bears the cost of return shipping.

Governing Law

Indicate the state or jurisdiction whose laws will govern the interpretation and enforcement of the agreement.

Key Roles and Responsibilities at a Glance

For clarity, here's a quick look at the main roles in a consignment arrangement:

Steps to Draft Your Agreement

1. Define the Scope: Clearly identify the type and quantity of goods to be consigned and the general purpose of the agreement.
2. Identify All Parties: Collect the complete legal names, addresses, and contact details for both the consignor and the consignee.
3. Outline Key Terms: Discuss and agree upon the core terms, including pricing, commission, payment schedules, duration, and responsibilities for expenses and risk.
4. Draft the Document: Utilize a comprehensive template or engage legal counsel to draft the agreement, incorporating all discussed provisions.
5. Review Thoroughly: Both parties should meticulously review the draft to ensure all clauses are clear, fair, accurate, and reflect the agreed-upon terms.
6. Sign and Distribute: Once reviewed and agreed upon, both parties must sign the agreement. Each party should retain a signed original copy.

Best Practices for Your Consignment Agreement

• Be Specific: Avoid vague language. The more detailed and specific each clause is, the less room there is for misinterpretation or disputes.
• Consider an Inventory Schedule: Attach an itemized list of all consigned goods, including their condition and agreed-upon price, as an appendix to the agreement. This makes tracking easier.
• Set Performance Expectations: Include clauses related to the consignee's efforts in selling the goods, such as marketing strategies or display requirements.
• Address Loss or Damage: Clearly specify the consignee's liability for loss or damage to items while in their possession, beyond what is covered by insurance.
• Seek Legal Counsel: For complex or high-value consignments, it is highly advisable to have a legal professional review or draft the agreement to ensure it is legally sound and protects your interests.