Meaning
Inventory arrangement where the owner of goods delivers them to a merchant for sale while retaining legal ownership until the final transaction occurs. In a commercial consignment, the merchant acts as a bailee with the power to sell the items to third parties. The title passes directly from the owner to the buyer at the moment of sale.
This structure allows retailers to carry a wider range of products without the immediate cost of purchasing the stock.
Title Retention
Ownership of the goods stays with the consignor despite the physical possession by the consignee. This legal separation ensures that if the merchant becomes insolvent, the owner can reclaim the unsold stock. However, a commercial consignment must be publicly recorded to protect this ownership against the merchant’s creditors.
Creditor Risk
Secured parties who have a lien on the merchant’s inventory might claim the consigned goods if they are unaware of the owner’s interest. To prevent this, the owner must file a financing statement and notify existing lenders. Failing to follow these steps means the goods could be seized to pay the merchant’s debts.
Payment Trigger
Revenue from the sale of the items is split according to the agreed commission or fee. Once the merchant sells a piece of inventory, the commercial consignment agreement requires them to remit the wholesale price to the owner. This process often includes a reporting schedule where the merchant provides a list of sold items and the remaining balance.
Owners use these reports to manage production and restock the shelves. Consignment remains a popular strategy for luxury goods and expensive equipment.
