Understanding the Fiduciary Duties of Consignment Shops

Many Florida retailers sell goods on consignment. Florida law defines consignment as “accepting for sale…secondhand goods which, having once been used or transferred from the manufacturer to the dealer, are then received into the possession of a third party.” Under consignment, the owner of used goods transfers possession, but not title, to the third party, who typically receives a commission if and when the goods are sold.

Recently, a federal appeals court addressed the legal responsibilities a consignment shop owes to property owners. The case addressed the proper legal remedy for a property owner who believed the consignment shop was not dealing fairly with them.

Zaki Kulaibee Establishment v. McFliker

ANI is a Florida company that deals in used aircraft parts. Zaki is a Saudi Arabian company that owns a supply of aircraft parts acquired from the Royal Saudi Air Force. Zaki originally sold parts to ANI and later entered into a consignment relationship. In 2003, the two firms signed a consignment agreement, whereby ANI would earn commissions based on its sales of Zaki’s aircraft parts. Zaki provided more than five million individual parts under the consignment agreement.

Soon after signing the agreement, Zaki expressed concerns over the accuracy of ANI’s sales reports with respect to the consigned parts. Litigation ensued and continues to this day. Zaki’s key claims are that ANI underreported sales and collected improper charges for storage of the consigned parts.

Zaki has been unable to determine just how many consigned parts remain with ANI. ANI has refused to provide Zaki with a complete accounting of its inventory. Accordingly, Zaki asked a federal judge in Miami to order such an accounting as part of a breach of contract lawsuit against ANI.

After two years of pre-trial discovery, however, ANI still failed to produce an accounting. The case proceeded to trial, where a jury awarded Zaki over $312,000 in damages on its breach of contract claim. The trial judge rejected Zaki’s request to order an accounting, leading Zaki to appeal.

In a decision issued on November 18th of this year, the U.S. 11th Circuit Court of Appeals agreed with Zaki it was entitled to an accounting. Applying Florida law, the appeals court said there was a “fiduciary relationship” between ANI and Zaki, and that as the receiver of consigned goods, ANI had a legal “obligation to render a true and accurate account” of Zaki’s property.

Here, the trial court failed to order an accounting, and said Zaki should rely on discovery instead. But the 11th Circuit explained discovery was inadequate for this situation. Indeed, ANI managed to “manipulate” the discovery process for two years in order to avoid an accounting. The trial judge should have simply ordered the accounting and been done with it, according to the appeals court.

Enforcing Contract Duties

As the 11th Circuit’s decision made plain, a contract for consignment of goods creates a fiduciary relationship under Florida law. Like any business relationship, it is essential for both parties to understand and abide by the terms of their agreements. If you need advice on consignment or any other aspect of Florida law in this area, contact Naples attorney John S. Sarrett today.

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