What is a Consignment Agreement?
How to Write a Consignment Contract
A consignment business is one in which a store (either online or brick and mortar) gets its inventory by entering into agreements with individuals who wish to sell their own personal property. A common type of consignment business is a clothing store that sells used clothing on behalf of the previous owner. Having a concise, easy-to-understand yet still legally enforceable contract between the store owner and the property owner will ensure that people will want to sell their products in your store.
Ensuring the Contract Meets Legal Requirements
Make sure all parties are legally able to participate.The contract will not be valid unless you make sure that everyone involved is an adult with the legal right to enter into a contract. The following must apply to both the owner of the consignment store and the person who wants to sell items at the store:
- In almost all cases, a contract is not legally valid unless the parties involved are at least 18 years of age.However, in most states, an emancipated minor may enter into binding contacts. Additionally, a parent or guardian usually can enter into contracts on the behalf of their children or wards.
- All parties must have the mental capacity to fully understand the contract. Even an adult may not be capable of understanding what the contract requires him to do.
- A contract is void if a party was intoxicated or otherwise mentally impaired when the contract was signed.
Exchange something of value.In a legal contract, something of value has to be exchanged for something else of value. In a consignment contract, the owner of the store typically promises to display the consignment items in the store and try to sell them, in exchange for a portion of the sale price.
- In this case, the owner is giving something of value (by displaying and trying to sell the goods), in exchange for something else of value (a cut of the profits from the sale).
Discuss the terms of the contract.For a contract to be legal and binding, an offer must be made and accepted. Before you write up a contract, both parties should have the same general idea about what the contract will stipulate. Having a discussion beforehand saves time, since if the information in the contract isn't acceptable to one of the parties it will have to be revised.
- Negotiate. If the parties do not agree on all terms at the outset, you can negotiate until the terms are favorable for everyone involved.
- Come to an agreement in good faith. All parties should be treated fairly and honestly, and all should do all they can to abide by the contract's requirements. Therefore, if you are selling goods at a consignment store, you should make every effort to sell the items. If you are the owner of something that will be sold on consignment, you should be honest about the item’s condition and value.
Determine if the contract needs to be written down.In all states, for a contract selling goods, a “written record” of the contract, signed by both parties, is required if the goods are worth more than 0.
- If the items that will be sold are not worth 0, a verbal contract is okay.
- However, in order to prevent any confusion about the terms of the contract, and to protect both parties if there is a disagreement, it is always a good idea to write down the contract terms.
Thinking About What Should be Included in a Consignment Contract
Determine the length of the consignment cycle.It is important to remember that some items offered on consignment will not sell. Setting a time frame during which the item must be sold or returned to the original owner ensures that your store will not become overburdened with items that no one wants to buy.
Include an explanation of what will happen with any unsold items.There are options you can choose from to dispose of unsold items. You may offer to return the item to the original owner or arrange to donate unsold items to charity. Be clear about what will happen to the item if the owner does not pick it up in a certain time frame after you determine that it will not sell.
Determine the sale price of the item.This figure will vary depending upon what the item is, but the store owner should set the price at which the item will be sold and the item owner should agree to that price. If either party is unsure about the value of the item, look online to see what similar items are being sold for as a starting point.
- If the item being sold is of considerable value, consider having it appraised before accepting it for sale.
- Take into account the brand, style, condition, and age of each item while setting the price.
Set the percentage that each party will receive when the item sells.The store owner bears the cost of storing the item, as well as paying for rent and utilities of the store, and therefore usually takes a larger share of the proceeds of the sale. A 50/50 deal is common.However, either party may negotiate for a different percentage.
- Additionally, some store owners will offer a greater percentage of the sale to the item owner if the owner agrees to payment in the form of “store credit” as opposed to cash.
- A store owner may also offer to pay the item owner cash when the owner drops off the item. In this case, the item owner is able to receive payment immediately, but the owner bears the risk of the item not selling at all. In this situation, the item owner is usually paid less than if he or she waited for payment until the item sold.
Explain payment options.Be clear about when and how the item owner will be paid for the sale of her items. Typically, the store owner will pay all people whose items were sold at the end of the consignment period. However, the store owner could also pay the item owner upfront.
State which party is responsible if the item is damaged or destroyed while at the store.In many cases, the owner will “disclaim liability” for damaged items in the contract. However, the parties’ may negotiate this term.
- For example, if the item being sold is very expensive, the seller may want to ensure that the owner assumes responsibility for any damage while in the store.
- Additionally, either party may request that the item is insured while it is in the store, which would protect both parties from losing money if the item is damaged.
Writing the Contract
Start with basic information.Write the date at the top of the page, then write the names or company names of both parties in this format: "This contract is between ___ and ___." If there is other identifying information you want to include, such a person's title or business designation, include it here.
- For example, the owner of the store should put the name of the store in place of his or her own name, because the store, not the owner personally, is contracting to sell the items.
Include all contract terms.The contract should include everything that is agreed to by the parties. In most situations, the contract will include all of the information discussed in part 2, such as the price of the item, how long the item will be kept, and who will bear the risk of loss if the item is damaged while at the store.
Include enough detail.In clear, readable language that is easy to understand, describe what goods are being given to the store and what sale percentage the store will take. Making the contract as detailed as possible will prevent confusion and will insure that both parties are on same page.
- For example, write "Anna’s Consignment Store agrees to try to sell Ashley Smith’s green and pink J. Crew sweater, and will take 40% of the sale price of (or ). Ashley will be paid the remaining by check within 10 days after the sale of the sweater.”
- When identifying the items to be sold, state the color, size, style, brand and any other identifying details.This will prevent confusion if the store has multiple items that are similar. For example, you could write "the green and pink J. Crew sweater is a size small" if there were other green and pink sweaters that it could be confused with.
Include a clause describing how the contract will be terminated.Specify how long the contract will last. For example, you could state that the contract will end when the item is sold, or specify how long the store will hold the item for.
Reserve the last page for the parties to sign and date the contract.Provide spaces for each name and spaces for the date the contract is signed.
- When you and the other party are both in agreement that the contract is final, sign and date the contract and have the other party do so as well.
- Keep a copy of the contract for your reference, and make sure the other party has one as well.
Know the effect of signing a contract.A contract is an agreement that is legally binding on the parties who sign it.If one party does not do what is specified in the contract, the other party has legal remedies and can sue to either enforce the contract or recover money damages.
- Essentially, once the contract is in place, the parties are legally required to perform their obligations, and if one party fails to perform, the other party can sue to enforce the contract terms.
- For example, if the owner of the store refuses to display the item to be sold, or if the item seller decides he or she wants the item back before the consignment term has ended, either party could be in breach.
How do I recover goods from a consignment store?
How do I write a consignment contract if I want to rent out individual spaces?
I gave a consignment shop just over 200 pieces of new costume jewelry. She wasn't selling it, so I started to get it back 7 months later. She gave me less than half of the pieces back, all of them were cheaper pieces. She claimed she lost the others. What can I do?
Who pays the taxes on a consignment contract, the store or the vendor?
- This article provides legal information. This article does not provide legal advice. If you need legal advice, contact a licensed attorney.
Sources and Citations
- Contracts: Cases and Doctrines, Fifth Edition (Aspen Textbooks).
- Contracts: Cases and Doctrines, Fifth Edition (Aspen Textbooks).
- Chirelstein's Concepts and Case Analysis in the Law of Contracts, Seventh Edition (Concepts and Insights Series)
- Contracts, the Essential Business Desk Reference, Richard Stim (pgs. 108-110)
- The contract does not need to contain legal jargon in order to be enforceable. Write the contract so both parties understand what you are agreeing to. It is a good idea to have the contract typed rather than handwritten. It need not be on any special paper to be enforceable.
- If you are unsure if you have written the contract so that it will be enforceable, have a lawyer review it before you use it.
Video: What is CONSIGNMENT AGREEMENT? What does CONSIGNMENT AGREEMENT mean?
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