How to Distinguish a Distribution Contract with a Consignment Contract?

Some companies would entrust trading companies to sell products for various reasons, and both parties would sign contracts. In practice, those contracts have different titles, such as a distribution contract , or a consignment contract, and contents are various as well. Then, how to determine the right title and contents?

The specific provisions in the “Contract Law” have listed many named contracts, however, the distribution contract and the consignment contract have not been listed in such provisions. According to Article 124 of the “Contract Law”, such unnamed contracts shall be governed by the general provisions of the “Contract Law”; and the specific provisions in the “Contract Law” with similar circumstances or other laws could be taken as a reference.

After analyzing the judgments which have been in force, the normal opinions on the 2 contracts are that, (1) ”Distribution” refers to a manufacturer who choose one or several trading companies to sell its products within the designated areas, in order to guarantee its commercial reputation and reduce the sales costs. The business mode is that a distributor purchases products from the manufacturer, and then sells the products to clients. Therefore, the relationship between the manufacturer and the distributor could take articles related to the sales and purchase contract, which are stipulated in the specific provisions in the “Contract Law”. (2) “Consignment” refers to a manufacturer entrusts one or several trading companies to sell its products, and it will pay a certain portion of its profits to those trading companies. Therefore, the relationship between the manufacturer and the consignee could take articles related to the commission contract, or contracts of commission agency, which are stipulated in the specific provisions in the “Contract Law”.

Upon the clarification of the difference between a distribution contract with a consignment contract, the contents between the two shall be distinguished as follows.

First, under a distribution contract, the ownership of the subject matter shall be shifted to the distributor (the buyer) from the time of delivery, unless otherwise agreed; under a consignment contract, the ownership of the subject matter shall belong to the manufacturer (the seller) who could claim the ownership at any time before the subject matter has been sold.

Second, under a distribution contract, the distributor (the buyer) could not ask for a return at will, and it shall undertake the risks related to the subject matter in stock, unless otherwise agreed; under a consignment contract, the consignee (the buyer) could ask for a return at will, and the manufacturer (the seller) shall undertake the risks related to the subject matter in stock.

Third, under a distribution contract, the distributor (the buyer) could sell the subject of matter at the price decided by itself, normally, the manufacturer (the seller) could not interfere the distributor’s (the buyer’s) pricing right; under a consignment contract, normally, the consignee (the buyer) could only sell the subject of matter at the price decided by the manufacturer (the seller).

Fourth, under a distribution contract, the profit of the distributor (the buyer) is the price difference, so the price of the subject of matter may be divided into a unit price and a total amount; under a consignment contract, the profit of the consignee (the buyer) is the commission, so the price of the subject of matter may be divided into a unit price, a total amount and a commission ratio.

Fifth, under a distribution contract, the payment could be made before the delivery, after the delivery, or by installments; under a consignment contract, the payment would be made after the sale in principle.

In summary, although many articles of the two contracts may be similar, such as the unit price, quality, delivery time and method, and so on, the legal character of the two contracts are different. As a party to those contracts, it is recommended to clarify the intention of the transaction, and drafting an appropriate agreement.