Consignment Agreement

A consignment agreement governs goods placed with another business for sale without an ordinary upfront purchase by that business, with the supplier as the consignor and the selling party as the consignee. The agreement sets who controls the goods, how sales are reported, what commission or margin is earned and when proceeds are remitted.

The arrangement can help a retailer offer products without paying the full purchase price before they sell, though those advantages depend on accurate inventory records and a trustworthy outlet. The parties should agree on when a sale occurs and when payment is due, because a point-of-sale transaction, delivery to the end customer and expiry of a return period may be different dates, and they should state how cancellations and consumer returns affect the amount owed.

Suppose the outlet sells goods worth $50,000 and retains an agreed 30% commission, so the simple payment to the supplier is $35,000, before returns, taxes or other agreed charges. If the outlet instead buys goods for resale at a wholesale price, the economics and accounting may be different, so do not use a commission formula to describe every arrangement called consignment.

Price control should be explicit, including who sets the retail price and who approves markdowns, because a supplier can lose expected proceeds if slow-moving stock is discounted without permission. The outlet may be unable to sell effectively if every small promotion needs a slow approval, so establish a process for campaigns and end-of-season goods.

Risk of loss needs separate treatment from legal title, so state who insures stock against fire, theft and damage, the coverage basis and the claims process. Record what happens if goods expire or deteriorate while at the outlet, and note that a clause saying the supplier owns the goods does not by itself guarantee the supplier will be paid or recover the goods if the outlet becomes insolvent.

In US transactions within the scope of UCC Article 9's consignment rules, a consignee can be treated as having rights and title to goods for certain creditor and purchaser purposes while it possesses them, so proper filing and priority questions may matter. That is jurisdiction-specific, but it shows why a supplier should ask local counsel about insolvency exposure before shipping high-value stock on a handshake.

Accounting follows control and the applicable standard, not only the word on the agreement, and IFRS 15 includes indicators that goods are held on consignment rather than transferred to a dealer as a sale. The supplier should assess when control transfers and when revenue is recognised, since shipping goods to an outlet may not yet be a sale to the final customer, and the retailer's gross-versus-net revenue treatment needs its own principal-versus-agent analysis.

Set a stock-count schedule in which the consignee records opening units, deliveries, sales, returns, write-offs and closing units by product, and the supplier reconciles those movements to its own inventory records. Investigate a shortfall before automatically charging the retailer or assuming theft, because damaged goods, mislabelled returns and timing differences can also explain a discrepancy.

Returns of unsold goods are not automatic under every deal, so agree on the return window, condition, transport cost and who bears the risk in transit, and remember that seasonal goods may require earlier decisions than durable products, since an outlet that can ask the supplier to take everything back at any time creates an exposure for warehouse space and cash flow. The agreement should state term, termination, collection of remaining stock, final reconciliation and the records each party can inspect, because if a partner stops trading prompt access and clear identification of goods may matter, and a well-run consignment arrangement makes every unit, sale and remittance traceable from delivery to final settlement, with local advice obtained for property and insolvency rules where exposure is significant.