Consignment agreement: who owns the goods, who is responsible for them, and what happens in a collapse

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What is consignment, and why is the difference from an ordinary sale so important?

You delivered goods to a shop or a distributor. It sold some of them, and then went into insolvency. Who owes you money, and what happens to the stock left on the shelves? The answer depends on one question: did you sell the goods to it, or did you deliver them on consignment?

In consignment, the consignor, who owns the goods, delivers them to the consignee (the shop, the distributor) so that it will sell them to customers, but ownership does not pass to the consignee. The goods remain the consignor’s until they are actually sold, the consignee passes on the proceeds minus its commission, and goods that were not sold go back to the consignor. In an ordinary sale, by contrast, ownership passes on delivery (or as agreed), the buyer owes the full price even if it sold nothing, and a seller who was not paid is an ordinary creditor.

Israel has no dedicated law on consignment. The arrangement is built from contract law, from the Agency Law, 5725-1965 (חוק השליחות, התשכ״ה-1965) (the consignee sells on behalf of the consignor), and from the Bailees Law, 5727-1967 (the consignee holds someone else’s property). Anything not written in the agreement will be decided by these default rules, and by the court’s interpretation. Reviewing a commercial agreement before signing is especially important here, because the words “sale” and “consignment” alone do not decide anything: the court looks at the substance of the arrangement.

The substance test: who bears the risk of the sale?

The signs of a genuine consignment: the consignee does not have to pay until it has sold; it may return goods that were not sold; the consignor sets the price or the price range; the consignee reports sales and stock; and the proceeds are passed on to the consignor minus a commission. When the consignee has to pay in any case, may not return goods and bears the price risk, it is in fact a credit sale, even if the agreement is called “consignment”.

The distinction matters most in insolvency. Under the Colombo rule (CA 455/89), it was held at the time that a “retention of title” clause in a credit sale is a disguised pledge that must be registered under the Pledges Law, 5727-1967 (חוק המשכון, התשכ״ז-1967), and if it was not registered, the seller loses out to the creditors. The Supreme Court reversed this rule in an application for leave to appeal, LCA 1690/00 M.S. Kidohei HaTzafon Ltd. (19 May 2003), in an expanded panel of seven justices: a retention of title clause in a credit sale is a legitimate commercial arrangement, and the seller may keep ownership until full payment without registering a pledge. What this means for suppliers: even someone who sells on credit can protect themselves with a written retention of title clause, but a genuine consignment remains the simplest protection, because ownership never passed.

What must every consignment agreement include?

• Ownership: an express statement that the goods remain owned by the consignor until they are sold to an end customer, and that the consignee holds them only as a bailee.
• Price and commission: the sale price or a price range, the commission rate, and who is authorized to approve discounts.
• Reporting and payment: a sales and stock report on a fixed date (for example, once a month), and transfer of the proceeds within a few days of the report. It is worth providing that sales money will be held in a separate account until it is transferred.
• Insurance: who insures the goods against theft, fire and damage while they are with the consignee, and who pays the premium.
• Marking and identification: the goods will be marked and managed separately from the consignee’s own stock, with delivery notes and signed stock lists. This is the evidence that will decide the matter in insolvency.
• Term and termination: the term of the agreement, advance notice of termination, and the consignor’s right to get the unsold stock back within a set time.
• Slow-moving stock: what happens to goods not sold within an agreed period: return, an approved discount or destruction, and who bears the cost.

A numerical example: consignment compared with a credit sale

A manufacturer delivered 100 items to a shop at a shelf price of NIS 200, with an agreed commission of 30% (the figures are for illustration only). Within a quarter, 60 items were sold.

• On consignment: the shop collected NIS 12,000 and passes NIS 8,400 (70%) to the manufacturer, and the 40 unsold items remain owned by the manufacturer and go back to it. If the shop collapses, the manufacturer demands the 40 items from the trustee, and claims the NIS 8,400 not yet transferred as a creditor.
• In a credit sale: the manufacturer issued an invoice for 100 items at a wholesale price of NIS 140, NIS 14,000 in total, and does not depend on the shop’s sales. If the shop collapses before payment, the manufacturer is an ordinary creditor for NIS 14,000, unless it kept ownership with a written retention of title clause, in which case it can demand the items not yet paid for.

The conclusion: consignment reduces the consignor’s credit risk and shifts the sales risk onto it; a credit sale does the opposite. The choice between them is a business choice, but the wording must reflect the choice actually made.

Who is responsible if the goods are stolen or damaged?

The consignee holds someone else’s goods and benefits from doing so, so it is a “paid bailee” under section 1 of the Bailees Law. Section 2(b) of the Law provides that a paid bailee is liable for the loss of or damage to the property, unless they were caused by circumstances that the bailee did not have to foresee and whose consequences it could not prevent, “but where the purpose of keeping the property was secondary to the main purpose of holding it, the bailee is exempt if the loss of or damage to the property was not caused by its negligence”. For a consignee, the main purpose of holding the goods is selling them, not keeping them, so the default is liability for negligence only: poor storage, a lack of reasonable security or failure to insure create liability; a break-in that could not have been prevented by reasonable means does not necessarily do so.

The parties may agree otherwise. A good agreement states expressly what counts as negligence, who insures, and what happens to damage that insurance does not cover. Without such a clause, the argument ends up in court.

What happens when the consignee goes into insolvency?

This is the situation the agreement was signed for. Under the Insolvency and Economic Rehabilitation Law, 5778-2018 (חוק חדלות פירעון ושיקום כלכלי, התשע״ח-2018), the trustee appointed for the debtor collects its assets for the benefit of the creditors; the insolvency estate of a corporation includes “any asset of the corporation” (section 216(1) of the Law), so an asset that does not belong to the debtor is not part of it. The consignor must prove two things: that the arrangement is a genuine consignment (and not a sale), and that the items in the consignee’s warehouse are its own and can be identified. That is why the delivery notes, the signed stock lists, the marking and the regular reports matter: without them, the trustee will argue that your goods cannot be told apart from the debtor’s stock.

Sales money that the consignee collected and did not pass on is a different matter: this is money in the debtor’s estate, and the consignor is a creditor for it. A clause requiring the money to be held in a separate account and earmarked for the consignor improves the consignor’s position, but does not guarantee it. Details on the order of priority of creditors are in the guide to the order of priority in insolvency.

Breach of the agreement: what do you do?

The common breaches: the consignee does not report, sells below the agreed price, does not transfer payments or refuses to return unsold goods. In each of these cases the consignor has the remedies for breach of contract (enforcement, cancellation and damages), and alongside them a cause of action in unjust enrichment when the consignee holds proceeds that are not its own. In serious cases, such as selling the goods and hiding the proceeds, there may also be a criminal aspect, which is handled by a complaint to the police and not in the civil claim.

The first step is a warning letter: the details of the breach, a demand for a stock report and for payment or the return of the goods within a set time, and notice that the agreement will be canceled if the demand is not met. Document the stock delivered and the reports received: the gap between them is the basis for the claim. More on the remedies in the guide to remedies for breach of contract, and on the ways to end the agreement in the guide to canceling a contract.

Consignment is one of several distribution models. If the consignee is also supposed to act on your behalf with customers, see agency agreements; if it buys and sells on its own account, see distribution agreements. More guides are in the commercial contracts information center.

Frequently asked questions

What is the difference between consignment and a credit sale with a retention of title clause?

In consignment, ownership does not pass at all, and the consignee pays only for what it sold and may return the rest. In a credit sale the buyer owes the full price, and a retention of title clause only postpones the time when ownership passes until payment. Since the Kidohei HaTzafon ruling (2003), such a clause is valid even without registering a pledge.

Who is responsible for goods stolen from the consignee’s store?

The consignee is a paid bailee whose main purpose in holding the goods is selling them, so under section 2(b) of the Bailees Law it is liable if the theft was caused by its negligence, for example a lack of reasonable locks or an alarm. The agreement can extend the liability or require insurance.

The consignee went into insolvency: how do you get the goods back?

Apply to the trustee with a demand for the return of the goods, with the agreement, the delivery notes and the stock lists that prove the goods are yours and can be identified. Proceeds that were collected and not passed on are claimed as a debt within the proceedings.