Consignment agreement: How-to guide

Businesses choose consignment arrangements for many reasons. Retail stores may want to test marketplace demand for a new product. Those stores can sell goods on consignment without investing initial capital in purchasing them outright: the store will remit payment only when the consigned items are sold.

A confident manufacturer (or artist or other “creator”) may be willing to take that risk, secure that its goods will sell themselves. It can shore up that risk as well, requiring in its consignment agreement that the retail store invest significant marketing dollars in promoting the goods.

Although a consignment arrangement may be profitable for both retailer and creator in the long run, it is essential that, at the outset, each party signs and maintains paperwork sufficient to protect and satisfy its individual interests.

Things you need to follow in your consignment arrangements

Have a thorough understanding of the product

Have an in-depth discussion about the products to be consigned. What makes them unique? What makes them attractive to purchasers? Who is the audience for these products? The more information the parties share, the greater the opportunities for marketing and sales.

Clarify the terms and conditions of the consignment contract

Before writing your agreement, decide what your goals are. A good legal contract is one that captures the intentions of the parties accurately. Take a moment to clarify the terms and conditions of the agreement before memorializing them in written form. If any provision of your agreement is confusing, try to make it clearer. A few hours spent improving your agreement now could prevent weeks of future headaches.

Provide enough time to review the entire agreement

Allow each party to spend some time reviewing the agreement. This will prevent the parties involved from claiming that they didn’t understand the terms of the agreement. 

Include all relevant deal points

In your consignment agreement, you must ensure you’ve included all the deal points clearly and precisely.

Sign the consignment contract before consigned goods are sold

A contract should be signed before services are performed, goods are exchanged, or money is transferred.

Keep copies of the signed contract

Sign two copies of the agreement, one for you and one for the other party.

Decide whether the consignment agreement should be signed before the notary

Depending on the nature of its terms, you may decide to have your agreement witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

Retain essential documents 

Careful record-keeping is essential to the consignment relationship. The manufacturer or creator should prepare and present an inventory sheet with each delivery and keep this sheet up to date with payment summaries and count totals. Good recordkeeping can limit later disagreements or lawsuits.

Seek legal help in case of doubts

If your deal or agreement is complicated, it is good to contact an attorney to help you draft a contract that will meet your specific needs.

Important components of a consignment agreement

The following instructions will help you understand the terms of your consignment agreement.

Introduction of parties

Identifies the parties involved in the consignment agreement and the date when the agreement will be signed. In the agreement, the party that is providing the property or product is called the “consignor.” The party that is selling the property is called the “consignee.”

Recitals

This section explains why the parties wish to sign the consignment agreement.

Consigned property

This part describes the property that will be sold by the consignee on behalf of the consignor and how many units of each item will be provided. Use as much detail as possible, including (if available) factory codes, serial numbers, model and style numbers, etc. You and the other party should also agree on an initial retail price for each listed item and the date on which those goods will be delivered.

Delivery of goods

It explains that the consigned items are being provided on a consignment basis only and that the consignor bears both the cost of delivering the products and the risk of any loss or damage occurring during that transport.

Consignment period

This clause provides information regarding the time period. Most commonly, the initial length of the consignment period is one month. This period automatically extends from month to month afterward unless either party ends it. You and the other party can enter a maximum amount of time a consignment period can be extended.

Efforts to sell

It’s one thing for a retailer to allow items to sit in its store. It’s another for that retailer to promote the sale of those items by giving them proper positioning and attention. This section provides that the consignee’s obligations go beyond simply keeping the products in its store: it must also make reasonable efforts to sell the property at the price agreed upon.

Title to products

A consignment arrangement differs from most relationships between manufacturers and stores selling on their behalf.

In the usual case, property ownership is transferred to the store when the property is received: they have paid to purchase it, which is part of the company’s assets. By contrast, the property transferred in a consignment agreement is still owned by the manufacturer, even though it is in the hands of the store.

This paragraph emphasizes again that the parties to the agreement are entering into a consignment arrangement.

Payment terms and commission

In this section, you and the other party can decide what percentage of the sale will be kept as the consignee’s fee for its services. You can also determine whether unsold goods should be returned. If yes, provide the time period the consignee has to return the property after the agreement ends.

No assignment

This segment states whether the consignee has to remit the remaining proceeds within a certain number of days or whether monthly payments would be preferable for your arrangement.

Risk of loss and damage

If any property is lost or damaged, the person in possession of it should pay for that loss.

Return of products

This allows the consignor to request a return of the products when a reasonable notice period is provided. The two parties can determine how long this period should be. In addition, after the end of the consignment term, the consignee can demand that the consignor retrieve its products. The parties can determine that time frame as well.

Additional terms

This optional provision can include any additional terms that have not already been listed. For example, if the parties exchange confidential information, you may want to include a provision governing the protection of that information. Alternatively, you and the other party may want to provide that if and when products are sold, replacement products will be provided to the consignee by the consignor within a certain amount of time.

Termination

Explains that either party can end the agreement anytime for any reason. If the parties decide to end the agreement, this paragraph indicates when and how any unsold products should be dealt with. According to this clause, either party can transfer its obligations under the agreement without the prior written consent of the other party.

Notices

Lists the addresses to which all official or legal correspondence will be delivered.

Default

It is an optional provision that can be used to provide additional security to the consignor. Essentially, this section indicates that if the consignor requests that the consignee file papers swearing officially that the products are owned by the consignor, the consignee is obligated to do so.

No product warranties

Indicates that there are no warranties on the consigned products, except to the extent required by law.

Consignor’s representations, warranties, and indemnification

This section indicates that the consignor owns the consigned products and that no other person or company is interested in the product. It also states that the consignor will be responsible for the cost of defending this title.

Governing law and equitable relief

Allows the parties to choose the state and county laws that will be used to interpret the agreement. Note that this is not a venue provision: the included language will not impact where a potential claim can be brought.

The provision also allows the parties to seek equitable relief (i.e., court remedies requiring a party to perform or refrain from performing certain acts) for any agreement violation.

Entire agreement

The parties’ agreement that the document they’re signing is “the agreement” about the issues involved. In other words, if previous agreements or promises surface, only the signed document remains valid. Unfortunately, the inclusion of this provision will not prevent a party from arguing that other enforceable promises exist, but it will provide you some protection from these claims.

No implied waiver

This part explains that if either party ignores or allows the other to break an obligation under the agreement, it does not mean that the party waives its future rights to enforce the same (or other) obligations.

Severability

Protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law is passed prohibiting choice-of-law clauses, it will not undo the entire agreement. Instead, only the section dealing with the choice of law would be invalidated, leaving the remainder of the agreement enforceable.

Counterparts; electronic signatures

The title of this provision sounds complicated, but it is simple to explain. It says that even if the parties sign the agreement in different locations, or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement. In a modern world where signing parties are often not in the same city—much less the same room—this provision ensures that business can be transacted efficiently without sacrificing the validity of the agreement as a whole.

You can easily sign your agreements much faster with the help of LegalZoom’s eSignature service. By opting for a suitable subscription plan, you will get access to the eSignature service and a rich editor to customize LegalZoom forms.

Headings

This segment states that the headings at the beginning of each section are meant to organize the document and should not be considered operational parts of the agreement.

How does a consignment agreement template help?

A well-drafted consignment agreement provides for some form of inventory control and a clear allocation of the rights and responsibilities of each party. A written agreement minimizes confusion, misunderstanding, and error and clearly sets forth the parties’ expectations and fulfillment obligations.

Having a consignment agreement template helps create a comprehensive agreement. An agreement template, along with including essential points, will keep a check on applicable laws and regulations, insurance coverage for consigned items, exclusive rights that the parties agree to, and other payment terms. LegalZoom’s consignment agreement template provides you with the foundation to create your agreement with ease.

Once an agreement is drafted, necessary parties can easily sign the document. Once signed, each party will be able to focus on its area of expertise: the retailer on selling and the manufacturer on creating. In every way, this promotes a successful division of labor and a profitable long-term business arrangement.

Frequently asked questions

What's a consignment agreement?

A consignment agreement, otherwise called a consignment contract, allows someone to sell goods through a party who will collect a fee or a percentage once the goods are sold. The responsibilities of the two parties regarding the storage, display, sale, or delivery of the goods and other factors can vary according to the agreed terms. Hence, a consignment agreement is essential to ensure both parties understand the terms when one sells on behalf of the other.

What key details are required to complete a consignment contract?

Here's the information you'll need to have handy to complete your consignment agreement:

• Who it's coming from: Determine if a business or individual is sending the consignment agreement and have the name and contact information ready.
• Who it's going to: Know who this document is going to and have the individual or business name and contact information ready.
• Subject matter: Have the details of the types of goods that will be sold.
• Dates: Be clear about the agreement's timeline, including the start date.