When done right, a consignment agreement can be a win-win for all involved. One business can retain ownership of their goods until sold, making sure they receive payment for every item. The other business doesn’t have to come up with the cash upfront for inventory, lowering their financial risk.
However, both parties must have a clear and well-drafted consignment agreement to protect their interests. If not, consignment agreement legal issues can arise.
If that’s the problem you’re facing now, it’s important to know what to do next. Here’s what you need to know about how to handle consignment agreement legal issues.
Consignment Agreements and the Law
A consignment agreement is a contractual arrangement between two parties, usually a consignor (like a supplier or manufacturer) and a consignee (like a retailer or distributor).
To break it down simply, consider this example. Imagine two neighbors: Bob, who has a huge barn full of apples, and Tom, who owns a popular fruit stand by the main road. Bob wants to sell his apples but lacks the visibility Tom’s stand offers.
The consignment agreement: Bob tells Tom, “Hey, how about you display my apples at your stand? If they sell, you give me a portion of the sales. If they don’t sell after some time, I’ll take them back or we can figure out what to do next.”
Tom thinks it’s a good idea because he doesn’t have to buy the apples upfront. He only pays Bob for the apples that sell.
In this example, Bob is the consignor, and Tom is the consignee. Bob (the consignor) sends goods to Tom (the consignee), who is [1] responsible for selling those goods. Tom doesn’t immediately buy the goods but pays Bob a portion of the revenue or a fixed amount once the goods are sold. And that is how consignment agreements work.
Key Components of a Consignment Agreement
The key terms of the consignment agreement should include:
- Transfer of possession, not ownership: Even though the consignee has possession of the goods, the actual ownership remains with the consignor until they are sold.
- Payment upon sale: The consignor gets paid only when the consignee sells the consigned goods. If the goods are not sold within a certain time frame, they might be returned to the consignor.
- Inventory reports: Consignees are expected to provide regular updates on the inventory status. This helps the consignor track how many goods are sold, how many are still on hand, and if there are any damaged or lost items.
- Risk of loss or damage: The agreement should clearly define who bears the risk of loss or damage while the goods are in the consignee’s possession. Typically, the consignee is held responsible for any loss or damage to the goods during the consignment period.
- Consignment fees: In some cases, the consignee may charge a fee for housing and displaying the goods, separate from the sales commission.
- Duration: The agreement will mention how long the consignment period lasts, after which unsold goods might be returned to the consignor, or the agreement might be renewed.
- Termination: Conditions under which either party can terminate the agreement should be noted.
- Pricing: The agreement may dictate who sets the sale price – the consignor, the consignee, or both jointly.
Potential Legal Issues in Consignment Agreements
A host of problems can arise when a consignment agreement is entered without consulting a legal expert. Some of the most common issues include:
- Unclear ownership. One of the main points of consignment is that ownership of the goods remains with the consignor until they are sold. If the agreement is unclear, it could result in disputes, especially if the consignee’s business goes bankrupt. In this case, the consignor may have to prove that the goods still belong to them and not the consignee’s creditors.
- Risk of loss or damage. If not clearly defined, disputes can arise over who is responsible for goods that are lost, stolen, or damaged while in the consignee’s possession.
- Payment disputes. Issues can arise if the agreement is unclear on when and how the consignor gets paid. This includes disagreements over sales figures, returns, commissions, or other fees.
- Inventory reporting. If regular inventory reporting isn’t required or if there’s a lack of clarity on how it should be done, the consignor might be in the dark about the status of their goods.
- Pricing conflicts. Disagreements can arise if it’s not clear who sets the sales price or if there’s a perceived undervaluation or overvaluation of consigned goods.
- Unsold goods. There could be disputes over the return of unsold goods, especially if the agreement doesn’t specify conditions or timing for returns.
- Conflicts of interest. The consignee might prioritize the sale of other products over the consigned goods, especially if they bought inventory that competes directly with the consigned items.
Both parties should engage in due diligence and consult legal professionals when creating and entering into a written consignment agreement. Proper documentation, regular communication, and a clear understanding of responsibilities can help prevent many of these challenges.
How to Resolve Legal Disputes Related to Consignment Agreements
Even with a well-crafted agreement, there’s a chance that you run into legal issues with a consignment deal. There are several ways to handle legal disputes; the right approach will depend on the severity of the issue, the terms of the agreement, and the parties’ preferences.
Before taking action, review the consignment agreement and be sure you understand the terms and conditions. Check for clauses related to dispute resolution, governing law, and jurisdiction. The agreement might have provisions that guide how disputes should be addressed.
Start with a direct conversation with the other party. Often, disputes arise from misunderstandings that can be resolved amicably through open dialogue. This is the quickest and often least expensive way to address disagreements.
If you can’t come to a resolution, potential next steps include:
Mediation
If direct talks don’t lead to a resolution, consider mediation. This is a form of alternative dispute resolution where a neutral third party (the mediator) helps the disputing parties reach a mutually acceptable resolution. Mediation is generally less formal, less expensive, and faster than litigation.
Arbitration
Some consignment arrangements include an arbitration clause, requiring parties to resolve disputes through arbitration rather than the courts. In arbitration, a neutral third party (or parties) evaluates the dispute and makes a binding decision. This process is more formal than mediation but can be quicker and less expensive than court litigation.
Litigation
As a last resort, parties may opt for litigation, taking the dispute to court. This can be time-consuming, expensive, and strain business relationships, but it might be necessary for complex disputes or when significant amounts of money are involved. It’s essential to consider the legal jurisdiction stipulated in the consignment contract and where the litigation should occur.
The Importance of Hiring Legal Counsel
Regardless of the chosen method, working with a legal professional familiar with consignment agreements and related disputes is a good idea. They can offer advice, clarify legal rights and obligations, and represent you during negotiations or formal procedures.
When meeting with an attorney, ensure all relevant documentation is organized and accessible. This might include the original consignment agreement, subsequent amendments, communications between the parties (letters, emails, etc.), inventory reports, and other pertinent records.
Remember that even if you initiate legal proceedings, there’s always an opportunity to negotiate a settlement before a final ruling. Settlements can save time, money, and further strain on business relationships.
Tips for Choosing the Right Legal Representation
Choosing the right legal help is crucial in a consignment agreement dispute. An attorney with the appropriate expertise can provide valuable guidance, keep your interests in mind, and help you achieve a favorable outcome. Here are some tips to consider when seeking legal representation:
- Specialization: Seek an attorney or law firm focusing on contract law, business disputes, or consignment agreements. They should have experience in the industry or domain related to your dispute.
- Experience: Ask about the attorney’s track record in handling similar cases. How many consignment agreement disputes have they managed? What were the outcomes?
- Referrals: Word of mouth can be a valuable tool. Ask colleagues, friends, or other professionals in your industry if they have recommendations. Personal experiences from trusted sources can provide some information about the attorney’s competence and demeanor.
- Local knowledge: If your dispute is likely to go to court, it can be helpful to hire an attorney familiar with state laws, the local court system, its judges, and its procedures.
- Initial consultation: Most attorneys offer an initial consultation for free or a nominal fee. Use this meeting to gauge your comfort level with the attorney, their understanding of your case, and their proposed strategy.
- Fees and other costs: Understand the fee structure upfront. Will they charge by the hour or offer a flat fee for specific services? Are there any additional potential costs? Some attorneys work on a contingency fee basis, getting paid only if you win the case.
- Negotiation skills: Many disputes are settled outside of court. Your attorney should be a skilled negotiator, aiming to achieve the best possible outcome without necessarily resorting to litigation.
Call Tayne Law Group Today
If you’re in the midst of a consignment agreement dispute, the Tayne Law Group, P.C. team is here for you. Our New York-based law firm tailors solutions to your specific situation and can help you with the tricky legal process with expert legal advice. Call us for a free consultation at 866-890-7337 or fill out our short contact form, and we’ll get in touch.
