A consignment agreement is used to specify the terms of an agreement between a consignor and a consignee whereby the consignee can use, store, and most commonly, sell merchandise belonging to the consignor. The objective of the agreement is to specify the terms, conditions, and procedures for the sale of merchandise through others. The consignee may receive some consideration in terms of a certain percentage of the sales as commission.
The most important clauses of this agreement include the rate of commission, a deadline for sales, the procedure to sell the merchandise, and the consequences of being unable to sell the merchandise. Several other clauses must be included in the agreement, which is detailed in this article. Additional clauses to suit the case can be inserted. If the case involves unusual circumstances, it is advisable to contact an attorney.
A consignment agreement is also called a consignment sales agreement or consignment inventory agreement.
Who Takes the Consignment Agreement? – People Involved
You would need to enter into a consignment agreement if:
- You are a consignor selling merchandise through another person.
- You are a consignee selling merchandise on behalf of a consignor in the interest of commissions.
- You are a consignor contracting with a consignee to allow them to use, store, or sell your goods.
The contracting parties here are the consignor and the consignee.
Purpose of the Consignment Agreement – Why Do You Need It?
The purpose of a consignment contract is to:
- Lay down the terms and conditions of the consignment and to ensure both parties acknowledge them.
- Establish the relationship between the contracting parties as a consignor and consignee.
- Express that the consignee is either expected to use, store and sell the goods belonging to the consignor.
- Protect the interests of both contracting parties, making legal recourse an option in the event of a dispute.
If you (consignor) are entering into an arrangement whereby a person or entity (consignee) is tasked with using, storing, and/or selling your goods, a consignment agreement must be used to establish the terms and conditions governing the arrangement, establish the relationship between the contracting parties, and describing the scope of what the consignee is expected to do with the goods. Like all agreements, the primary purpose of the agreement is to make legal recourse an option, should a dispute arise.
If a written consignment agreement is not used, it might become difficult to establish the existence of a valid contract in case of a dispute. It also gives more room for misunderstanding and miscommunication of terms and conditions, which increases the likelihood of a dispute. For these reasons, it is ideal for a consignment agreement to be drafted when entering into an arrangement whereby a consignee will be selling the goods of a consignor.
Contents of the Consignment Agreement – Inclusions
An effectively drafted consignment contract must be detailed and include the following terms:
- Effective Date: This mentions the date on which the agreement becomes effective. It is a standard yet critical clause that must be included.
- Parties to Contract: This clause identifies the parties to the contract, that is, the consignor and consignee. It must mention their names and addresses. If one or more parties are businesses or legal entities, their registration data must also be included.
- Relationship: This term establishes the consignor-consignee relationship between the parties.
- Commission: This clause mentions the terms of the commission to be paid to the consignee, including the formula of calculation of the rate of commissions, the rate of commissions, and the mode of payment of these commissions.
- Sales Deadline: This term mentions the deadline by which the consignee should sell the goods.
- Consequences of No Sale: This term stipulates the consequences of a situation where the consignee is unable to sell all or a portion of the goods. Usually, there is a certain minimum quantity of goods that the consignee is expected to sell, and the inability to sell at least this minimum quantity of goodwill invokes the consequences mentioned under this term, which is often a penalty or in some cases, termination of the contract.
- Confidentiality: This provision ensures that any information that the parties are accessible over the course of the arrangement must be treated as confidential and cannot be revealed to any other person, persons, or legal entity.
- Termination: This clause specifies the circumstances under which the agreement may be terminated.
- Governing Jurisdiction: This clause specifies the jurisdiction that will govern any disputes that may arise out of the agreement.
- State-specific Laws: Include any clauses and terms that may be required for compliance with state-specific laws and legislation.
How to Draft the Consignment Agreement?
The procedure to draft a consignment agreement:
- Mention the effective date of the agreement, that is, the date on which the agreement will come into effect.
- Identify the contracting parties with their names and addresses.
- Establish the relationship between the parties.
- Detail the object of the agreement and the scope of the duties of the consignee.
- A clause that lays down the terms of payment of commissions must be included. It must specify the formula for calculation of the rate of commissions, the rate of commission, the mode of payment, and any other benefits.
- The sales deadline must be expressed.
- The consequences of no sales must be clearly expressed.
- Make provisions for confidentiality and non-disclosure to protect any privileged information that the consignee might receive over the course of the arrangement as per this agreement from being disclosed to any other persons or legal entities unless required for fulfilling the duties prescribed by the agreement.
- Provisions for termination of the contract must be made such that the circumstances under which the agreement may be terminated are clearly expressed.
- Include any additional clauses that might pertain to the arrangement.
- Include any other clauses that might be required for compliance with local, state, or federal laws.
- The agreement must state the name of the jurisdiction that will govern the document and any disputes that arise from it.
- Have the parties to the contract sign it to signify acceptance of terms.
Things to keep in mind:
- Discuss the goods involved in detail.
- Ensure that the goal of the agreement is clear before putting the agreement on paper.
- The terms must be expressed in a clear and unambiguous manner.
- Allow each party the opportunity to review the terms of the document and raise objections, if any, before ratification.
Negotiation Strategy
The terms of the contract must be negotiated such that it is mutually beneficial and agreeable to both parties, in order to avoid dissatisfaction that could lead to disputes. The interests of both parties must be kept in mind while framing the document, and neither should be significantly disadvantaged or nourished at the expense of the other.
Benefits & Drawbacks of the Consignment Agreement
The benefits of having a consignment contract:
- Gives a clear overview of the terms and conditions involved, avoiding ambiguity and miscommunication.
- Safeguards are the interests of both parties.
- Makes legal recourse an option, should a dispute arise.
The drawbacks of having a consignment contract:
- The legal costs of framing the agreement must be borne by one or both of the parties.
- Negotiations can take time.
The benefits often outweigh the drawbacks of having an agreement governing the transactions. In case there is no written agreement, it might become difficult to establish the existence of a contract in court, in case of a dispute. The lack of a written agreement might also give rise to misunderstanding and disagreement of terms, which further increase the probability of a dispute.
What Happens in Case of Violation?
In case the terms of the contract are breached by either party, the aggrieved party can resort to the legal resolution of the dispute, either by arbitration or conventional dispute resolution methods(1). Depending on how the agreement suggests disputes should be handled, the parties might be required to amicably settle the dispute internally or by alternative dispute resolution methods before going to court.
Consignment agreements are essential legal documents that govern an arrangement where a consignor sells his goods through a consignee, who is paid a commission from the sales for his efforts. The most important terms in a consignment agreement are the sales deadline, consequences of no sales, and rate of commission clauses. Consider having the agreement notarized or witnessed in order to reduce the chances of the validity of the signatures being questioned.
A well-drafted consignment agreement will clearly express the rights and duties of the parties without using vague or ambiguous language that might confuse or unintentionally mislead the parties(2). Both parties must ensure that the agreement is read and ratified before performing any services, exchanging goods, paying any money, or otherwise performing the duties that they are entrusted with by means of the agreement. The ratification of the document must not occur until both parties are satisfied with the terms of the agreement. In case there is any confusion, the parties must contact their attorneys.