Goods that are offered for sale on consignment have been shipped to the seller by the owner, with the seller acting as agent for the owner. Generally the owner, known as the consignor, retains title to the goods and authorizes the seller, known as the consignee, to sell them. For example, an art gallery selling original art is usually a consignee for the artworks, while the artist is the consignor who retains ownership of the art until it is sold.
For the rights of the consignor to be fully protected under the Uniform Commercial Code (UCC), it is necessary that the person making delivery meet one of the following conditions: (1) the consignor must comply with an applicable law providing for a consignor's interest or the like to be evidenced by a sign; (2) it must be established that the consignee is generally known to be engaged in selling the goods of others; or (3) the consignor complies with the filing provisions of Article Nine of the UCC covering secured transactions.
If none of the above conditions is met, then the goods in possession of the consignee are considered to have been delivered for resale and are subject to the claims of the consignee's creditors, provided that the consignee maintains a place of business where such goods are normally sold. The consignee's creditors' claims take precedence over those of the consignor, even if such goods are delivered under an agreement purporting to be "on consignment" or "on memorandum." In this way the UCC differentiates between goods shipped on consignment and those shipped for resale in the normal course of doing business.
When a consignee accepts merchandise for resale, he or she is obligated to exercise due diligence in caring for the goods and in selling them. Although the consignee does not have any money at risk in the consigned goods, the UCC provides remedies for consignors if their goods are damaged through the negligence of the consignee.
Delivering and selling goods on consignment allows the consignee to carry inventory without having to raise adequate working capital to cover the cost of such inventory. Until the consigned merchandise is sold, it is carried on the books of the consignor. Typically the consignee provides the consignor with sales reports accounting for merchandise received and sold, expenses incurred relating to the consignment, and cash remitted. When the goods have been sold, the consignor recognizes the revenue and removes the inventory from the books.
Exporting goods on consignment is a common way to finance exports. The exporter ships merchandise to an importer on consignment, with the exporter retaining title to the goods and carrying the goods on its books as inventory. The importer does not pay the exporter for the goods until they are sold, at which time title is transferred to the buyer. Once the goods are sold, the importer is paid, and payment is made to the exporter. In these types of transactions it is common practice for the importer's bank to act as trustee for the consigned goods, with payments to the importer and exporter made through the importer's bank.
[ David P. Bianco ]
Albaum, Gerald. International Marketing and Export Management. Third edition. Reading, MA: Addison Wesley Longman, 1998.