Consignment refers to a business arrangement where goods are delivered to another party (usually a dealer or retailer) for the purpose of sale. In this arrangement, the consignor, who owns the goods, retains ownership until the goods are sold by the consignee. The consignee is responsible for selling the goods and remitting the proceeds back to the consignor, minus a fee or commission for the service. If the goods are not sold, they are returned to the consignor.
Key Definitions
Consignor: The owner of the goods who delivers them to the consignee for sale.
Consignee: The party (usually a dealer or retailer) who receives the goods from the consignor and is responsible for selling them.
Bailment: The process of placing property in the custody and control of another, where the recipient holds the property in trust for a specific purpose.
The Concept of Bailment in Consignment
Consignment falls under the broader legal concept of bailment. Bailment is the act of placing property in the temporary custody or control of another. In the case of consignment, the goods are bailed for the purpose of sale.
Types of Consignment
Consignment for Sale
In this type, the dealer receives goods solely for the purpose of selling them. The dealer must attempt to sell the goods and return the sales proceeds to the consignor after deducting an agreed-upon commission.
Consignment for Care
Though less common, a consignment can also involve placing goods with a dealer for their safekeeping.
Historical Context
Consignment has been a common practice throughout history, facilitating trade and commerce. In medieval times, merchants would consign goods to agents in distant markets, who would sell the items and return the proceeds.
Application and Examples
Retail Industry
Retail stores often take goods on consignment to minimize inventory costs. For example, a bookstore might sell books that are consigned by their publishers.
Art Galleries
Art galleries frequently operate on a consignment basis, displaying artists’ works and selling them to patrons, remitting the sale price back to the artists minus a gallery fee.
E-commerce
Online platforms such as eBay and Amazon offer consignment-like services where sellers can list items for sale, and the platform takes a commission on each sale.
Comparison with Related Terms
Consignment vs. Outright Sale
In an outright sale, the ownership of the goods is transferred to the buyer at the time of purchase. In consignment, ownership remains with the consignor until the goods are sold by the consignee.
Consignment vs. Lease
In a lease, the use of an asset is transferred for a specified period in exchange for payment, whereas in consignment, the physical goods are transferred for sale purposes without transferring ownership.
Frequently Asked Questions
What happens if consigned goods are damaged?
Responsibility for consigned goods typically falls on the consignee while the goods are in their possession. The terms of the consignment agreement usually specify who bears the risk for damages.
Are consignment agreements legally binding?
Yes, consignment agreements are legally binding and should be detailed in outlining the responsibilities of both parties. The agreement should address issues such as commission rates, unsold goods, and liability for damages.
How is revenue recognized in consignment?
Revenue is typically recognized by the consignor when the consignee sells the goods and the sale proceeds are settled.
Summary
Consignment is a valuable and flexible arrangement in trade and commerce, allowing consignors to market their goods through various channels without transferring ownership until the sale is complete. It provides benefits like reducing inventory risk for retailers and expanding market reach for producers. Understanding the specifics of consignment agreements, including their legal and financial implications, is crucial for successfully leveraging this business arrangement.
References
- “Business Law” by P.C. Tulsian, McGraw Hill Education
- “Commercial Contracts: A Practical Guide to Standard Terms” by Richard Lawson, Lloyd’s of London Press
- “Modern Economic Theory” by K.K. Dewett, S. Chand Publishing
By understanding consignment, businesses and individuals can make informed decisions on how to efficiently manage and sell goods.
