Transfer of goods that does not constitute transfer of ownership

Author: Nikoloz Pkhaladze, Attorney at Law

In business, a situation frequently arises where a manufacturer or supplier wishes to sell its products through a store or distributor, but does not want to sell the goods to them upfront, prior to sale. Consignment responds to precisely this need.

The Concept of Consignment

Consignment is a form of commercial relationship in which one party — the consignor (the owner of the goods) — transfers goods to another party, the consignee, so that the latter may sell them. The consignee sells the goods in their own name, but at the expense and in the interest of the consignor.

The central idea of this relationship is that the transfer of goods does not mean the transfer of ownership. The goods remain the property of the consignor until the consignee sells them to a third party.

A simple example: A manufacturer provides products to a store "on consignment". The store pays only for the goods it actually sells, and returns the unsold portion. The store does not purchase the goods — it merely sells them in the owner's interest and receives a commission.

Key Characteristics of Consignment

  1. Ownership remains with the consignor prior to sale. This is an important protection mechanism — in the event of insolvency or bankruptcy of the consignee, the goods do not form part of their insolvency estate.
  2. Settlement only for realized goods. The consignee accounts only for the goods actually sold and receives an agreed remuneration (commission).
  3. Return of unsold goods. Upon expiration of the realization period, unsold goods, as a rule, are returned to the consignor.
  4. Allocation of risk. The risk of unsold goods or unsalability is primarily borne by the consignor, unless agreed otherwise in the contract.

Consignment in Georgian Law

It is important to understand that consignment is not a separate, named contract type under the Civil Code of Georgia. In practice, it is based on the provisions of a commission contract (Article 709 et seq. of the Civil Code), as well as mandate and other provisions — depending on the specific content of the contract.

This means that the legal consequences of a consignment relationship largely depend on how the contractual terms are drafted.

What Should Be Drafted in the Contract

Since consignment is not separately regulated, the best way to avoid risks is a clear contract. The following matters are particularly important:

  • Moment of transfer of ownership — who owns the goods prior to sale and when ownership passes;
  • Settlement procedure and deadlines, amount of commission;
  • Terms and deadlines for returning unsold goods;
  • Allocation of risk of damage, loss, or destruction;
  • Reporting obligation of the consignee;
  • Grounds for termination of the contract.

Practical Tip: Disputes often arise precisely when the parties do not specify in advance the moment of transfer of ownership and the fate of unsold goods. Before transferring or accepting goods "on consignment", make sure that these matters are recorded in writing.

This article is prepared for informational and educational purposes and does not constitute legal advice for a specific matter. To assess your situation, please contact an attorney.

Nikoloz Pkhaladze | Law Firm "Pkhaladze & Partners"

☎ +995 597 117 795 · 🌐 www.pkhaladze-law.ge · ✉ nikushapkhaladzelawyer@gmail.com