What is a consignment agreement?
Is a consignment agreement valid and enforceable in South Africa?
“The vehicles were delivered on consignment on terms that "ownership would remain vested in Jordashe until it had been paid in full", and "signed acknowledgements of the reservation of ownership were obtained"; the consignee therefore could not transfer to the bank an ownership it did not have, and the court held that "Absa has not established that it acquired ownership of the vehicles".”
“If a person, before the sequestration of his estate, by virtue of a contract of purchase and sale which provided for the payment of the purchase price upon delivery of the property in question to the purchaser, received any movable property without paying the purchase price in full, the seller may, after the sequestration of the purchaser’s estate, reclaim that property if within ten days after delivery thereof he has given notice in writing to the purchaser or to the trustee of the purchaser’s insolvent estate or to the Master, that he reclaims the property.”
When you need a Consignment
- A manufacturer, importer or wholesaler wants to place stock with a retailer, dealer, gallery or boutique to sell to the public without the retailer having to buy and pay for the stock upfront — while the supplier keeps ownership of the goods until they are sold.
- A supplier wants protection if the retailer holding the goods goes insolvent: under a genuine consignment the unsold stock remains the supplier’s property and can be reclaimed, instead of being lost to the retailer’s creditors.
- A retailer, dealer or agent wants to broaden its range and fill its shelves without tying up cash or carrying the risk of unsold stock, paying the supplier only for goods that actually sell and returning the rest.
- A business runs "consignment stock" at a customer’s premises or a vendor-managed inventory arrangement (common in FMCG, spare parts, motor "floor stock" and equipment), and needs to fix exactly when ownership and risk pass and how sales are reported and paid.
What a Consignment should contain
Retention of ownership until sale
The clause that makes it a consignment: title to the goods remains vested in the consignor and passes only when the goods are sold to a bona fide third-party customer (or as otherwise agreed). This is the consignor’s security — get it right and unsold stock can be vindicated on the consignee’s insolvency; get it wrong and the consignor is just an unsecured creditor who has already parted with the goods.
Agency / mandate to sell and authority limits
Appoints the consignee to sell the goods on the consignor’s behalf and sets the limits of that authority — minimum or fixed selling prices, no sales below price, no pledging, no offering the goods as security, and whether the consignee sells in its own name or as agent. It should be clear the consignee may pass ownership to a genuine buyer but to no one else.
Reporting, reconciliation and remittance of proceeds
How and how often the consignee reports sales, reconciles stock counts, and pays over the proceeds, less the agreed commission or margin. A best-practice term requires sale proceeds to be held in trust or kept separate and remitted by a fixed date — important because commingled cash can be lost on insolvency where the goods themselves cannot.
Commission, pricing and settlement
Fixes the consignee’s reward — a commission percentage, an agreed mark-up the consignee keeps, or the difference above a set floor price — plus VAT treatment, payment terms and how returns and price changes are handled. Consignment has its own VAT and accounting timing because the supply to the customer, not the placement of stock, is the taxable event.
Risk, insurance, storage and care of the goods
Records who bears the risk of loss, theft or damage while the goods are in the consignee’s possession (commonly the consignee, even though the consignor stays the owner), and requires the consignee to store the goods safely, keep them identifiable and separate from its own stock, and insure them with the consignor’s interest noted.
Identification, segregation and labelling of stock
Requires consigned goods to be marked, recorded and physically kept apart from the consignee’s own trading stock so the consignor’s property can be identified and reclaimed. Mixing consignment stock with owned stock blurs ownership and makes vindication on insolvency far harder to prove.
Return of unsold goods, recall and access
Gives the consignor the right to recall or rotate stock and to inspect and take back unsold goods on notice or on termination, and sets who pays return freight. Because the consignor owns the goods throughout, it retains a real right to demand them back — the contract should make the practical mechanics of doing so clear.
Anti-simulation and "true consignment" wording
Records the parties’ genuine intention that this is a sale-on-behalf with retained ownership, not a credit sale or a money loan secured over the goods. Courts look at the real substance of the deal (per Jordashe Auto), so the operative terms — not just the heading — must consistently reflect agency, retained title and accounting for proceeds, with no clause that betrays an outright sale to the consignee.
Insolvency, cession and termination
Addresses what happens if either party is sequestrated, liquidated or placed in business rescue: the consignor’s right to reclaim its goods, a prohibition on the consignee ceding or encumbering the consigned stock, and clean termination and stock-return provisions — the contractual backbone of the ownership protection.
Consignment agreement vs sale (or "sale or return") vs distribution agreement in South Africa
| Feature | Consignment agreement | Sale or return (pactum displicentiae) | Distribution / supply agreement |
|---|---|---|---|
| Does the recipient buy the goods? | No — it sells them on the consignor’s behalf as agent | Yes — a sale takes effect, but is undone if the goods are returned | Yes — the distributor buys the stock to resell on its own account |
| Who owns the stock on the shelf | The consignor, until each item is sold to a customer | The buyer (ownership passes), subject to a resolutive condition | The distributor, from delivery |
| What the recipient earns | Commission or an agreed margin on goods that sell | The resale profit; it has bought the goods | The resale margin; it has bought the goods |
| If the recipient goes insolvent | Consignor reclaims unsold goods (own property) — outside the estate | Goods generally form part of the estate (ownership had passed) | Stock forms part of the estate; supplier is an unsecured creditor |
| Who carries unsold-stock risk | The consignor (unsold goods come back) | Shared — buyer can return unwanted goods within the agreed time | The distributor (it owns the stock it bought) |
Common South African pitfalls
- Letting the deal look like a sale instead of a true consignment. If the wording or conduct shows the consignee actually bought the goods on deferred terms, a court (per Absa v Jordashe Auto) treats ownership as having passed and the supplier loses the insolvency protection. The operative clauses — not just the title "Consignment Agreement" — must consistently reflect agency, retained ownership and accounting for proceeds.
- Not keeping the consigned stock separate and identifiable. If the consignee mixes the goods with its own trading stock and does not label or record them, the consignor cannot prove which items it still owns when the consignee is liquidated, and the rei vindicatio becomes difficult or impossible — the practical defeat of an otherwise sound legal right.
- Failing to ring-fence the sale proceeds. Ownership protects the goods, but once they are sold the consignor is owed money. If the proceeds are paid into the consignee’s general account and commingled, the consignor ranks as an ordinary unsecured creditor for that cash on insolvency. Require proceeds to be held in trust or in a separate account and remitted promptly.
- Allowing the consignee to pledge, cede or encumber the stock. A consignee with possession can wrongfully give third parties (a bank floor-plan, a pledgee) the impression of ownership. Without an express prohibition and clear labelling, the consignor risks an estoppel or a good-faith third-party dispute — exactly the competing-claim scenario litigated in the floor-plan cases.
- Ignoring VAT, accounting and consumer-protection consequences. Consignment has its own VAT and revenue-recognition timing (the taxable supply is the sale to the customer, not the placement of stock), and consumer-facing consignment sales must still comply with the Consumer Protection Act. Treating consignment exactly like an ordinary sale for tax and compliance can create unexpected liabilities.
Frequently asked questions
Is a consignment agreement legally binding in South Africa?
Yes. A consignment agreement is a valid, enforceable commercial contract under South African common law — there is no dedicated statute, so it is governed by the law of contract, agency/mandate and property. Its key feature, recognised by the courts, is that ownership of the goods stays with the consignor until they are sold.
Who owns the goods under a consignment agreement?
The consignor (the supplier) remains the owner of the goods until each item is actually sold to a customer. The consignee only holds and sells the goods on the consignor’s behalf and never becomes the owner. That retained ownership is the whole point of consigning rather than selling stock to the retailer.
What happens to consignment stock if the retailer goes insolvent?
Because the unsold goods belong to the consignor, not the consignee, they do not form part of the consignee’s insolvent estate. The consignor can reclaim its stock using the owner’s remedy (the rei vindicatio), provided the goods are still identifiable and the consignment is genuine rather than a disguised sale. Sale proceeds already paid into a general account are weaker — there the consignor may rank as an unsecured creditor.
What is the difference between consignment and "sale or return"?
In a consignment, the retailer never buys the goods — it sells them as the supplier’s agent and the supplier keeps ownership throughout. In a sale or return (pactum displicentiae) a sale actually takes effect and ownership passes to the buyer, subject to a right to return unwanted goods. The difference is decisive on insolvency: consignment stock can be reclaimed; sale-or-return goods generally fall into the estate.
Can a consignment agreement be challenged as a disguised sale?
Yes. South African courts look at the true substance of a transaction, not its label. If the terms or conduct show the "consignee" really bought the goods on credit — or that a money loan was dressed up as a consignment — the court treats it as a sale (or a simulated transaction), ownership is taken to have passed, and the supplier loses its protection. This is why the agreement must consistently reflect agency and retained ownership.
Does the consignee or the consignor carry the risk if the goods are damaged or stolen?
It depends on the contract. Although the consignor stays the owner, well-drafted consignment agreements usually place the risk of loss, theft or damage on the consignee while the goods are in its possession, and require the consignee to insure them with the consignor’s interest noted. Setting risk and insurance out expressly avoids costly disputes when stock goes missing.
Is consignment the same as a distribution agreement?
No. Under a distribution or ordinary supply agreement the distributor buys the stock and owns it, reselling on its own account and carrying the stock risk. Under a consignment the consignee never buys the goods — it sells them on the consignor’s behalf for a commission while the consignor keeps ownership. The ownership and insolvency consequences are very different.
Do I need a lawyer to draft or review a consignment agreement?
It is strongly advisable. The retained-ownership, anti-simulation, stock-segregation, proceeds and insolvency clauses must all be exactly right, or the consignor loses the very protection it consigned the goods to obtain. MJ Kotze Inc drafts and reviews consignment agreements on a fixed-fee basis.
Sources & authority
- Absa Bank Ltd t/a Bankfin v Jordashe Auto CC (402/2001) [2002] ZASCA 130; [2003] 1 All SA 401 (SCA); 2003 (1) SA 401 (SCA) (27 September 2002)
- Insolvency Act 24 of 1936, s 36 — "Goods not paid for which debtor purchased not on credit"
- Insolvency Act 24 of 1936 (lawlibrary.org.za canonical work)
This guide is general information, not legal advice. It reflects the law as at June 2026.