Consignment Agreement from Indonesian Law Perspective

“While a consignment agreement has not been specifically regulated in Indonesia, a consignment agreement must be deemed a valid contract with its distinctive elements.”

The consignment agreement has not been specifically regulated by any legislative product in Indonesia. However, a consignment agreement is indirectly recognized by Indonesian law as one of innominaat contracts, which is defined as valid agreements that are not specifically regulated by name in Indonesian contracts law.

Legal Basis and Principles

Pursuant to Article 1319 of the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata or “ICC”), it is stated that all agreements, either known by a specific name or unknown thereby, shall comply to the general provisions regarding contracts. Insofar as all legal elements of a valid agreement are fulfilled, all terms agreed by and between the contracting parties must prevail. This legal principle is known as freedom of contract.

Under Article 1320 of the ICC, the legal elements as mentioned are stipulated to be as follow:

1. There must be consent from the parties of the agreement;
2. The consenting parties must retain the legal capacity to enter into an agreement;
3. There must be a specific subject of agreement; and
4. There must be an admissible cause on which the agreement is based.

Based on the freedom of contract principle, any type of agreement can be entered into, including a consignment agreement. This is because aside from the legal elements regulated by Article 1320 of the ICC as mentioned, Indonesian law does not stipulate any other mandatory requirements for an agreement to be considered valid. Unless an agreement between the parties is in violation of any prevailing law, all contracting parties are entitled to agree on any rights and obligations of each party.

Definition and Legal Implications of Consignment Agreement

A consignment agreement has been acknowledged and defined by Indonesian scholars as an agreement in which the seller (consigner) deposits goods to another party (consignee) to be sold to a third party on behalf of the seller (consigner), provided that the profits therefrom shall be deducted by a commission to the consignee as agreed (Yan Pramadya Puspa, 1977).

While a consignment agreement has not been specifically regulated in the ICC, consignment agreement is prevalent in practice, and it arises out of the legal principle of freedom of contract. In order to clarify the elements of a consignment agreement, there are 4 (four) characteristics postulated by an Indonesian scholar, namely (Munir Fuady, 1999):

1. The consigned goods remain within the ownership rights of the consigner, and thus the goods must be reported by the consignee to the consigner as available stock of the consigner.
2. Delivery of the goods from the consigner to the consignee does not immediately result in an income gained by the consigner.
3. As the owner of the goods, the consignor remains fully responsible for all costs related to the consigned goods as of the delivery until the consignee successfully sells the consigned goods to a third party.
4. The responsibility of the consignee is limited to the security and safeguarding of the consigned goods.

Comparison with Sales-and-Purchase Agreement

Pursuant to Indonesian law, Article 1457 of the ICC regulates that a Sales-and-Purchase Agreement (“SPA”) constitutes an agreement in which one party binds itself to a delivery of goods, and the other party binds itself to a payment accordingly. However, such provision must be read in the context of transfer of ownership rights over the delivered goods.

With regard to movable goods, the term “delivery” in Article 1457 of the ICC cannot be interpreted solely as an act of physical change of whereabouts, but rather as a legal action through which one party relinquishes its ownership right over an object and transfers such ownership right to another party.

To provide further context to Article 1457 of the ICC, Article 1460 of the ICC stipulates that if a SPA is drawn in which the objects have been determined, such goods become sole liability of the buyer immediately after the agreement has been reached.

This means that in a SPA, the seller no longer retains any legal interest over the goods purchased by the buyer. Once the goods have been delivered, the legal relationship is deemed to have been concluded between the parties. Accordingly, aside from the payment from the buyer, neither party is entitled to demand subsequent performance from the other.

Having established the definition and characteristics of both consignment agreement and SPA, the following points of comparison can be deduced:

Author: Yohana Veronica Tanjung

Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas e.g. Capital Market & Financial Services.

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