To make a consignment agreement, put in writing who owns the goods, who sells them, at what price, for what commission, on what payment schedule, who bears the risk of loss, how the arrangement ends, and what happens to anything left unsold — then, before you hand over inventory, file a UCC-1 financing statement and notify the consignee’s existing secured creditors so their claims can’t swallow your goods. The contract is the blueprint; the filings are what actually protect you.
What the Agreement Has to Do
A consignment agreement is a contract between the goods owner (the consignor) and the seller (the consignee) setting out how the consignee will sell those goods on the owner’s behalf. The consignor keeps legal ownership until a buyer pays, and the consignee earns a commission on each sale. Because the consignee never buys the inventory, the consignor carries most of the financial risk, and the written terms are what keep that risk contained.
Protect Your Ownership Before You Draft Anything Else
This is where most consignment arrangements go wrong. Under the Uniform Commercial Code, consigned goods sitting in a consignee’s shop can be seized by the consignee’s creditors as if the consignee owned them, unless the consignor takes specific protective steps. Writing “consignor retains title” into the agreement is not enough. UCC Article 2 treats goods delivered to a merchant for resale as the merchant’s own property for purposes of creditor claims, even when the parties call the deal a consignment and purport to reserve title.
When UCC Article 9 Applies
UCC Article 9 defines a “consignment” as a delivery of goods to a merchant for sale where each delivery is worth at least $1,000, the goods were not consumer goods before delivery, the merchant operates under a name other than the consignor’s, and the merchant is not generally known by creditors to be primarily in the business of selling other people’s goods.1Legal Information Institute. UCC 9-102 – Definitions and Index of Definitions If your transaction fits that definition, Article 9’s secured-transaction rules govern your ownership interest, and you have to perfect it or risk losing the goods.
Deliveries below $1,000, or involving consumer goods, sit outside Article 9’s consignment rules. That is not a green light. Under UCC Article 2, the goods are still exposed to the merchant’s creditors unless you comply with a filing requirement or can show the merchant’s creditors already know the merchant sells other people’s goods.2Legal Information Institute. UCC 2-326 – Sale on Approval and Sale or Return; Consignment Sales and Rights of Creditors
Perfecting Your Security Interest
Two steps, both before delivery:
- File a UCC-1 financing statement with the appropriate state office, usually the Secretary of State. This is a public notice of your interest in the goods. Filing fees typically run from $5 to $40 depending on the state. The statement must describe the consigned goods and name both parties.
- Send written notice to any existing lender that already holds a security interest in the consignee’s inventory, describing the consignment and the goods. Without that notice, those creditors’ interests outrank yours even if you filed a UCC-1.
UCC-1 filings expire after five years, so file a continuation statement before each expiration for as long as the consignment lasts. Skip any of these steps and the consignee’s creditors or a bankruptcy trustee can treat the goods as the consignee’s, leaving you as an unsecured creditor in line with everyone else. For a consignment of any meaningful value, an attorney familiar with secured transactions is worth the fee.
Terms the Agreement Must Contain
The Parties and the Goods
Open with full legal names and addresses of both sides. If either party is a business entity, use the entity name as registered with the state, not a trade name. A mismatch between the agreement and the UCC-1 filing creates real problems if you ever need to enforce your rights.
Describe the goods precisely enough that nothing is ambiguous: quantities, model numbers, serial numbers, condition notes, photographs where practical. For ongoing relationships where goods arrive in batches, set up a signed inventory receipt at each handoff.
Price, Commission, and Payment
Three numbers have to be pinned down: the retail price (or how it is set), the consignee’s commission, and when the consignor gets paid.
Commission rates vary by industry. Clothing consignment shops commonly keep 40% to 60% of the sale price. Furniture consignees typically take 30% to 50%. Luxury goods and vehicles usually run 10% to 30% because ticket prices are higher. Whatever the rate, specify whether it applies to gross sale price or to net price after discounts and returns.
Set a minimum acceptable price below which the consignee cannot sell without your approval. A consignee eager to move inventory will otherwise mark it down further than you would accept. Address who absorbs the cost of markdowns, return shipping, and credit card processing fees; these can erode the consignor’s proceeds significantly if the agreement is silent.
Set the payment schedule: how often the consignee remits (weekly, biweekly, monthly), the method, and a deadline measured in days after each sale or reporting period. Add teeth with a late-payment consequence, such as interest or the right to reclaim goods.
Risk of Loss and Insurance
State clearly who bears the financial risk if goods are damaged, lost, or stolen while in the consignee’s possession. In most consignment arrangements, the consignee takes on this responsibility from the moment of delivery.3Securities and Exchange Commission. Consignment Agreement – Motorcar Parts of America, Inc. and Rafko Logistics Inc. – Section: 2.4 Title and Risk of Loss
Require the consignee to carry insurance sufficient to cover replacement value, and to name the consignor as a loss payee on the policy.3Securities and Exchange Commission. Consignment Agreement – Motorcar Parts of America, Inc. and Rafko Logistics Inc. – Section: 2.4 Title and Risk of Loss Being named loss payee means the insurer pays you directly rather than sending a check to the consignee and hoping it gets forwarded. Specify the coverage types (general liability, property, theft) and require proof of insurance before you deliver anything.
Sales Reporting and Audit Rights
An agreement without reporting is one you cannot verify. Require regular sales reports, at minimum matching the payment schedule, showing which items sold, at what price, the commission deducted, and the amount owed. Require inventory reports on what remains unsold and its condition.
Include a right to audit the consignee’s records related to your goods. It does not need to be adversarial; it just needs to exist. Set how long the consignee must retain records after the agreement ends. Two to three years is standard for business records.
Term, Termination, and Unsold Goods
Define how long the consignment lasts. Most agreements run for a fixed period of 60 to 180 days, with automatic renewal unless either party gives written notice. A 30-day notice period is typical.
Allow either party to terminate early for cause: breach, bankruptcy, a change of business. Spell out what happens to unsold goods at termination: who pays return shipping, how quickly goods must come back, and what happens to items in transit to buyers when the agreement ends.
Goods that sit unsold for the full period are a frequent flashpoint. Address them up front. Options include automatic return to the consignor, price reductions with the consignor’s approval, or donation with a written release. Silence invites disputes.
Indemnification and Warranties
An indemnification clause protects each party from liability created by the other. The consignee should indemnify the consignor against claims arising from misrepresentations during the sale, unauthorized use of the consignor’s trademarks or branding, and any breach of the agreement.4Securities and Exchange Commission. Consignment Agreement – Motorcar Parts of America, Inc. and Rafko Logistics Inc. – Section: 7.11 Indemnity The consignor, in turn, should warrant that they own the goods, that the goods match the described condition, and that selling them does not infringe anyone’s intellectual property.
For goods with safety or regulatory requirements, such as electronics, food, or children’s items, the warranty section should address regulatory compliance. A consignee who unknowingly sells a recalled product faces real liability, and clear warranties allocate that risk.
Dispute Resolution and Governing Law
Build a process that escalates from informal negotiation to mediation and then, if necessary, to binding arbitration or litigation. Arbitration is faster and cheaper than a lawsuit but produces a binding result that is very difficult to appeal, so both parties should understand the trade-off before agreeing to it.
A governing law clause specifies which state’s laws apply. This matters most when consignor and consignee are in different states. Without it, a dispute can trigger a fight over jurisdiction before anyone reaches the actual problem.
Exclusivity and Territory
If the consignor wants to use multiple consignees for the same goods, say so. If the consignee is investing heavily in marketing and wants exclusive rights in a geographic area, say that. Define whether the arrangement is exclusive or non-exclusive, what territory it covers, and whether the consignor can sell the same goods directly, through their own website for example, without owing the consignee a commission.
Tax Points to Acknowledge in the Agreement
Tax law, not your contract, ultimately controls, but the agreement should acknowledge who does what. On the income side, the consignor reports the full sale proceeds as income and deducts the consignee’s commission as a business expense; the consignee reports only the commission as income.
On sales tax, name the party who will collect and remit on each sale. In most states, the party making the retail sale to the end customer, typically the consignee, is responsible for collecting at the point of sale, but the rules vary by state and both parties should confirm with the state taxing authority. Whoever handles collection needs a valid seller’s permit or sales tax license, which most states issue at little or no cost. If sales happen through an online marketplace, state marketplace facilitator laws may shift the collection duty to the platform for platform sales, though sales made outside that platform, at a physical location, a trade show, or a standalone website, remain the seller’s responsibility.
Signing and the Steps That Follow
Before signing, both parties should read the full agreement and confirm every number, commission rate, minimum price, payment deadline, insurance amount. A misplaced decimal in a commission clause can cost thousands over the life of the contract.
Both parties sign and date. Notarization is not legally required for a consignment agreement, but it adds verification that can matter if a signature is later disputed. Each party keeps a signed original. For high-value consignments, witnessed or notarized signatures are a small cost for meaningful protection.
After signing, handle the steps that live outside the four corners of the contract: file the UCC-1 financing statement if your consignment meets the Article 9 threshold,1Legal Information Institute. UCC 9-102 – Definitions and Index of Definitions notify the consignee’s existing secured creditors, verify insurance is in place with you named as loss payee, and confirm whoever collects sales tax holds the appropriate state permits. Those follow-up steps are what actually protect the goods.