Your Guide To A Consignment Agreement

The economy is built on buying and selling goods. If you have something you want to sell, though, you may not have the time, energy, resources or expertise to find the right buyer. Fortunately, you can consign your item to another person to sell it for you. When you do, you may want to consider executing a consignment agreement.

Contracts can be difficult to negotiate, draft and execute. Often, they are filled with legalese that can be tough to understand. After all, law students generally spend a full year taking contract classes. Because you probably don’t have any interest in enrolling in law school to draft a consignment agreement, we are here to help.

In this guide, we tell you everything you need to know about consignment agreements. Even better, we scrap the legalese and give the information to you straight. Please note, however, this guide is for informational purposes only. It does not constitute legal advice. Prior to executing any contract, it is important to seek competent legal counsel from a licensed attorney.

What Is a Consignment Agreement?

A consignment agreement is a type of contract. All contracts must have three elements: an offer, acceptance, and consideration. In the case of a consignment agreement, the offer comes from you. You offer to allow the seller to sell your item for you. If the terms are satisfactory, the seller agrees to them. Consideration is just a fancy way of describing giving something up. With a consignment agreement, the seller gives up his or her time to sell your item. In return, you pay the seller a percentage of the sales price.

Do Consignment Agreements Need To Be in Writing?

Generally, oral agreements are enforceable. As such, your consignment agreement probably does not have to be in writing. There is one significant exception, however. The Uniform Commercial Code, which has been adopted by most states, requires contracts for the sale of goods with a value over $500 to be in writing to be enforceable. As such, if your item has a value of more than $500, you likely need a written consignment agreement. Note, though, value amounts may vary from state to state.

Even if the value of your item is below the statutory amount, it is a good idea to execute a written consignment agreement. Written contracts are often superior to oral agreements, as they clearly describe the terms of the contract. Accordingly, it becomes much more difficult for contract parties to disagree about the details of the agreement.

What Terms Do Consignment Agreements Typically Have?

You can likely find a form for a general consignment agreement online. These are generic, though, so you may need to modify any you find to fit your specific situation. Usually, consignment agreements have the following terms:

  • The commission rate
  • The procedures of the sale
  • The sales deadline
  • The consequences of a failure to sell
  • Additional restrictions and limitations

If there is a need to seek enforcement of a contract in court, you should be aware of a common tenet of contract law. Generally, ambiguous contract terms are construed against the party who drafted the agreement. Therefore, if you plan to prepare the consignment agreement, you should ensure it is clear and unambiguous. If it isn’t, you could end up losing in court. The best time to work out any confusion is before you and the other party sign the agreement.

Who Executes Consignment Agreements?

There are a couple of situations where consignment agreements are common. The first is with private sellers. An individual has something he or she wants to sell and contracts with another person to sell it. Consignment agreements are also popular in business. Buyers at stores often use consignment agreements to expose their customers to new merchandise without assuming the risk of buying goods that may not sell.

Essentially, parties to consignment agreements decide to let each other do what they do best. The seller, called the consignee, knows how to sell goods. The other party, the consignor, has goods that need to be sold. When they execute a consignment agreement, the parties divide the work and create a profitable business relationship.

Because all parties to any agreement must protect their own interests, it is a good idea for everyone involved with a consignment contract to review and understand its terms. Both the consignor and consignee should maintain proper records to protect their unique interests. If both parties retain a copy of the agreement, each can refer to it to be sure they are not in breach of contract.

How Do You Write a Consignment Agreement?

Earlier in this guide, we outline the general terms that most consignment agreements have. Including these terms helps avoid confusion about the obligations of the parties. When you are drafting a consignment agreement, you should consider formatting it into four distinct sections.

Section 1: The Administrative Components

The first part of any consignment agreement must take care of some administrative housekeeping. The agreement should have a title, clearly identifying it as a consignment agreement. Also, the opening section of the agreement should clearly introduce the parties and list the date of the agreement. Remember, contracts must be clear to avoid litigation difficulties. If either of the parties is a business entity doing business under another name, you must explain ownership interests accurately.

Section 2: The Purpose of the Agreement

Even though the title of your agreement should clearly identify it as a consignment agreement, you must define the purpose of the agreement. In most contracts, this happens in the second section. Usually, identifying the general terms of the consignor/consignee relationship is sufficient to pass legal muster. As such, you likely want to state that goods are offered on a consignment basis for a fixed term. Upon expiration of the term, you should consider demanding that any unsold items be returned to the consignor.

Section 3: The Details of the Arrangement

All contracts must be sufficiently specific as to identify the goods to be sold in a clear way. In the third section of your consignment agreement, you should list the consigned property as accurately as possible. Be specific. If you can, try to identify the goods by color, size, serial number, UPC codes or other applicable descriptors. Also, list the sales price you agreed upon and record the date by which the consignor must deliver goods to the consignee for sale. Finally, describe the process by which the consignee will attempt to sell the goods to a buyer.

Section 4: Other Relevant Information

In the last section, you have an opportunity to clear up any unfinished business that doesn’t appear in the rest of the document. The end of most consignment agreements usually discusses delivery costs, insurance, arbitration, and other matters. You should also consider including a clause that discusses payment to the consignee in the event goods go unsold during the term of the contract.

For contracts to be legally binding, they usually must be signed by all the parties. In some places, signatures require notarization to verify their authenticity. While signatures at the end of the document are often sufficient to enforce a contract, you may choose to have all parties initial every page of the agreement. Doing so protects the consignor and consignee from allegations that pages were substituted or terms changed after the contract was signed.

What Are Some Best Practices for Executing Consignment Agreements?

There are many sample consignment agreements available for download online. While it is fine to work from these agreements when creating your consignment contract, you should be vigilant not to create a contract that is overly broad. Remember, ambiguities in contracts are frequently construed against the party that drafted the agreement.

Here are some best practices for drafting and executing a consignment agreement:

  • Be sure the transaction is a consignment agreement and not a sales agreement.
  • Talk about the obligations and responsibilities of the consignor and consignee before beginning to draft the agreement.
  • Circulate a draft of the agreement before signing it to allow all parties to clarify terms.
  • Rework any ambiguous terms in the contract.
  • Be sure the consignment agreement memorializes the entire agreement without referring to outside documents.
  • Carefully review the document for errors or omissions before signing it.
  • Consider hiring a lawyer to draft the consignment agreement for you.
  • Have all parties involved in the contract sign it.
  • Keep a copy of the contract and review it frequently.

Drafting and executing contracts are not actions you should take lightly. When creating a consignment agreement, you must take your time.

Why Should You Have a Consignment Agreement?

If you have goods you don’t want to sell on your own, you may benefit from having another person sell them for you. Likewise, you may have the marketing resources to facilitate sales for individuals who manufacture or otherwise own goods. Either way, signing a consignment agreement can protect your financial interests.

Remember, consignment agreements are binding contracts. It is always worthwhile to understand the terms of any agreement that binds you. If you need assistance drafting or understanding a consignment agreement, there is no substitute for experienced legal counsel.