What you need to know about Consignment
Ever heard of the stores Blue Spinach? Poshmark? The RealReal? These stores may be located in different parts of the world, but they have one thing in common. That is, they are all consignment stores that specialise in selling pre-owned items ranging from clothes and handbags to luxury items.
What is Consignment?
Consignment is a business arrangement whereby the owner of the products (consignor) authorises a third party (consignee) to sell the consignor’s products in return for a fee. Under this type of arrangement, the consignor remains the owner of the products until such products are sold by the consignee to the buyer, at which time the consignee is entitled to a percentage of the proceeds. The consignor assumes the risk that the consignee is unable to find a buyer for the products.
What are the pros and cons of selling your products on consignment?
The pros of selling on consignment are:
1. Lower cost for the consignor
Selling on consignment allows the consignor to sell his or her product at a minimal cost. With consignment, the consignor does not have to worry about major business costs like leasing of store space, hiring of employees, and the likes.
2. A great opportunity to introduce your product to the market
For small business-owners who are starting to introduce their products into the market, consignment proves to be a very efficient way to test the market without having to incur the significant expenses of opening a store.
3. Minimal risk for consignee
Since the consignor is the owner of the products and the consignee is merely holding on to the products until they are sold to buyers, the consignee is then able to earn money without having to spend on inventory.
The cons of selling on consignment are:
1. Product can move slowly or not be sold
Because the consignee assumes no monetary risk, there is a possibility that the consignee might not be motivated to aggressively promote the product. In this case, sales of the inventory can become stagnant or even become un-sellable.
2. High Risk for consignor
As the owner of the products, the consignor assumes the risk if there is damage to the product or whenever the products are unsold.
Who handles liability in case the consigned product is damaged?
While the idea of consigning a product seems attractive, the consignor should be wary about the fact that he or she remains to be the owner of the product, and therefore, is liable in case the product is damaged or defective.
The consigned products should be described as fully as possible by reference to their description, materials and dimensions and any other features so that buyers are not given a false impression about the quality or composition of the product. For example, the product should not be described as a “limited edition” when this is not the case.
Under the Australian Consumer Law, the owner of the product bears the cost of refunding the buyer’s payment in full if the purchased product is damaged or unfit for use unless the damage or the defect was caused by the consignee. Refund of buyer’s payment is typically subject to the condition that the buyer returns the product to the consignee for inspection or notifies the consignee of the problem, within a reasonable time and subject to the buyer has not damaged the products by using them in a way they were not meant to be used.
Consignment agreement between the Parties
The terms between the parties should state the start and finish dates for the consignment period and the commission payable, as well as the method of payment. Under a consignment agreement the following rights and obligations are common:
- the consignment is for a fixed minimum period, which may be extended;
- the consignor is entitled to receive the net proceeds of sale in connection with the consignment (gross sale price less any commission and expenses paid to the consignee);
- the consignee is indemnified by the consignor in respect of damage to the products;
- the consignor must pay any additional costs incurred by the consignee (such as cleaning, collection, and shipping of the merchandise), and
- products are sold at the risk of the consignor. The profit or loss belongs to the consignor only.
Johanne Sarcilla, B.A., LL.B
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Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.