Drafting a consignment agreement: what belongs in it

Drafting a consignment agreement amounts to conclusively answering four questions: who owns the goods while they are in the store, who bears the risk if something happens to them, when and at what price settlement takes place, and how the supplier retrieves their unsold stock. Surrounding this are labeling, counting, insurance, liability towards the end customer, and the return policy. The law does not provide a separate title for consignment, so everything you do not write down must be derived afterwards from safekeeping (Art. 7:600 BW), mandate, and purchase. Below, for each component, is a list of what belongs in it and where self-drafted contracts most often fall short.

The short answer

1. Ownership: expressly stipulate that the goods remain the property of the supplier until sale to the end customer.
2. Identification: labeling, serial numbers, separate records, and signed delivery notes per shipment.
3. Risk and insurance: who bears theft, fire, and damage, and under whose policy is the stock.
4. Settlement: reporting period after sale, price or margin, payment term and a periodic inventory count.
5. Return: maximum consignment period, who bears the return costs, and in what condition the goods must be returned.
6. Division of roles: does the reseller sell in their own name or on behalf of the supplier, and who is therefore the seller vis-à-vis the customer.

Drafting a consignment agreement: start with ownership and identification

State in the first substantive provision that the goods are not sold upon delivery but are placed on consignment, that the reseller holds them for the supplier, and that ownership only passes at the moment of sale to an end customer. Add thereto that the reseller may not pledge, encumber, transfer the goods to another location, or make them available to third parties without written permission.

That provision is legally correct but practically worthless without identification. In the event of bankruptcy, the supplier must be able to indicate to the bankruptcy trustee which items belong to him. Therefore, include concrete obligations: a consignment sticker or mark on every item, registration by serial number or item number, a separate location or section in the warehouse, separate inventory records, and a delivery note signed by both parties for each shipment. Also agree that the reseller will immediately inform the supplier in the event of seizure, an application for suspension of payments, or bankruptcy, and that he will immediately point out to the seizing party or bankruptcy trustee the consignment nature of the stock.

Risk, care and insurance

The reseller must exercise the care of a good custodian in safekeeping (Art. 7:602 BW). This is a standard of effort and not strict liability: in the event of burglary or fire, this does not automatically mean that he must pay. Therefore, explicitly regulate the risk.

• Transfer of risk: from the moment of delivery and signing of the receipt, the risk rests with the reseller until the moment of return.
• Insurance: the reseller insures the consignment stock against fire, theft, and water damage for at least the agreed consignment value, and provides a policy sheet upon request.
• Value per item: include a price list as an attachment, so that the amount does not need to be disputed in the event of damage.
• Storage conditions: requirements regarding temperature, humidity, presentation, or security, where the product requires it.
• Demonstration and loan: whether items may be used as display models, and who is responsible for the depreciation in value in this regard.
• Access: the right of the supplier to check and count the stock during opening hours.

Settlement, counting and return

The settlement is the rhythm of the collaboration. Specify within how many days after a sale the reseller reports what has been sold, whether this occurs per sale or per period, and when payment follows. Common practice is a monthly sales report with payment within fourteen or thirty days thereafter, combined with a quarterly count in which the physical inventory is compared with the records.

Also determine what happens in the event of a discrepancy between the count and the records. The practical rule is that missing items are deemed to have been sold and are therefore settled at the consignment price. Without this provision, disputes regarding lost items arise after every count. Article 7:403 paragraph 2 of the Dutch Civil Code already imposes an obligation on the contractor to render an account, but a concrete schedule in the contract is more workable than invoking the law retrospectively.

Three points apply to returns: a maximum consignment period per item, who bears the return costs, and the condition in which the goods must be returned. Include a final arrangement: at the end of the term, the supplier chooses between taking back the goods or reselling them, whereby the remaining stock is considered purchased at the agreed price. This prevents stock from sitting in a warehouse for years without revenue and without a return.

Division of roles towards the end customer

Explicitly choose whether the reseller sells in their own name or as an authorized representative on behalf of the supplier. If they sell in their own name, they are the seller vis-à-vis the customer and bear the associated statutory obligations, including conformity in consumer sales (Art. 7:17 BW) and the right of withdrawal in distance selling. If they sell on behalf of the supplier, the purchase agreement is concluded between the supplier and the customer, and the reseller receives a commission.

Also regulate what applies internally: which party repairs or replaces in the event of a defect, who bears the costs thereof, and how a complaint is passed on. Align this with an indemnity, so that the party held liable externally can recover its costs internally from the party responsible.

Finally, pay attention to the price agreement. If the reseller sells for their own account and risk, imposing a fixed or minimum selling price constitutes a prohibited restriction of competition (Article 6 of the Competition Act and Article 101 TFEU). A recommended price or a maximum price is permitted, however. Therefore, formulate the price determination carefully and ensure it aligns with the chosen division of roles.

Practical example: A jewelry supplier places collections with five jewelers without an agreement regarding missing pieces. During the initial count, eleven items with a consignment value of 9,400 euros are missing from one jeweler. Without a contractual rule, this becomes a discussion about theft, display models, and administration. A single sentence stating that missing items are settled as sold would have answered the question before it even arose.

Duration, termination and other provisions

• Duration and termination: fixed-term with extension or indefinite-term with a notice period of, for example, one to three months.
• Immediate termination: in the event of bankruptcy, suspension of payments, attachment, cessation of the business, or transfer of control.
• Right of repossession: the right of the supplier to collect the stock upon termination, with an obligation of cooperation on the part of the reseller.
• Exclusivity: whether the reseller may carry competing products and whether the supplier may supply others in the same service area.
• Confidentiality and data: regarding purchase prices, margins, and customer data, with an arrangement regarding who processes which personal data.
• Applicable law and forum: in the case of a foreign party, explicitly designate Dutch law and a competent court.

Honest recommendation

You do not always need a lawyer for this. If it concerns a limited value that you can write off without consequences, a single customer you know well, and a period of a few months, a two-page agreement with the title clause, a signed delivery list with item numbers and prices, a risk clause, and a settlement schedule will suffice. Keep a copy of every delivery note yourself and count at least once a quarter.

Do seek a review as soon as the placed value reaches an amount you cannot afford to lose, when working with multiple buyers and requiring a standard model, when placing goods across the border where the VAT regulations for call-off stock and applicable law apply, for products with warranty or product liability risks, or when the buyer has bank financing with a lien on their stock. In those situations, the text determines whether you recover your goods in the event of problems or are left with a claim on an empty estate.

Read more: what is a consignment agreement and having a consignment agreement drawn up. You can arrange this directly via the consignment agreement.

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