Basics on the Sale on Consignment

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2nd Jun 2017

consignment

When you are engaged in retail trade, sometimes it is not practical to buy huge volumes of stocks to sell to your customers as this will require a higher cost on your part. You also subject yourself to the risk of not being able to sell all the products. Thus, an alternative to an outright purchase of goods is the sale on consignment.

A sale on consignment is a sale of goods through a dealer or agency whereby title to the goods does not pass to the consignee. In addition, it is a contract whereby the goods are received by the consignee for sale, the mark-up being his commission, with the obligation to remit, within the period agreed upon, the proceeds of the sale, or to return of the goods if unsold to the consignor. [Pineda, Sales and Other Special Contracts, 2002 Ed., p. 31]

Consignment in its common meaning is an arrangement whereby the goods are sent by one to another to be sold and disposed by the latter for and on account of the former. (Bouiver’s Law Dictionary, 3rd Ed., Vol. 1).

Simply put, you basically get the goods from your supplier but you only pay your supplier once you have sold the goods. In this kind of transaction, the consignor, which is the person who usually owns the goods or is the supplier, consigns the goods to the consignee, the person who receives the goods.

A sale on consignment is different from a straight sale because in the consignment sale, title to the merchandise is retained by the principal (consignor) who authorized the agent (consignee) to sell for him the merchandise and to effectively transfer title thereto in favor of the purchaser. [Ongkiko vs. Court of Appeals, 154 SCRA 186, (1987)] As a consignee, he merely acts as an agent who has an obligation to remit the proceeds of the sales or return anything left unsold. (Webster’s Third New International Dictionary of the English Language, Unabridged).

It is thus clear that the consignee does not own the goods. However, in most consignment sale contracts, the consignor usually subjects the consignee to a suspensive condition that ownership over the goods will be transferred to the consignee upon sale of the goods to a customer or lapse of a certain period, whichever is earlier. In the former, ownership is ultimately vested on the customer upon actual sale, while in the latter, ownership is vested on the consignee who failed to return goods that were not sold within the stipulated period. Consequently, once the contractually stipulated period has lapsed, the consignee is obliged to pay the consignor regardless of whether the goods have been sold or not.

You may wonder, who is responsible for the goods while the suspensive condition has not happened?

A suspensive condition is one whereby the happening of the condition gives rise to an obligation. [De Leon, Comments and Cases on Obligations and Contracts, p. 115 (2000)] Since the consignor retains ownership over the goods unless either of the two (2) suspensive conditions happens, the responsibility over the goods shall be governed primarily by the terms of the contract between the two. However, if there are no contractual provisions on this, then the Civil Code of the Philippines will govern.

Under Article 1504 of the Civil Code, unless otherwise agreed, the goods remain at the seller’s risk until the ownership is transferred to the buyer, but when the ownership therein is transferred to the buyer, the goods are at the buyer’s risk whether actual delivery of the goods has been made or not.

Guided by this and other provisions of the Civil Code, the following rules in case of loss, deterioration or improvement of the goods shall apply:

1. If the thing is lost without the fault of the consignee, the obligation shall be extinguished.

2. If the thing is lost through the fault of the consignee, he shall be obliged to pay damages. It is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered.

3. When the thing deteriorates without the fault of the consignee, the impairment is to be borne by the consignor.

4. If it deteriorates through the fault of the consignee, the consignor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case.

Nicolas & De Vega Law Offices is a full-service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 4706126, +632 4706130, +632 4016392 or e-mail us at info@ndvlaw.com .

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