Dropshipping legal requirements

Looking for legal advice about Dropshipping?

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Is dropshipping legal in Australia?

Yes, it certainly is, as long as you comply with the Australian Consumer Law, the Corporations Act (if you operate a company) and other such legislation. Essentially, the same laws as other retail businesses are required to comply with.

Not only is it legal but dropshipping is a very popular online business model. It does not require a lot of startup capital (such as that required to purchase inventory) and is relatively quick and easy to set up. However, there are a few things which you need to get right.

The following sets out some of the dropshipping legal issues which entrepreneurs will need to consider when they are starting up and operating their business.

What business structure can be used for dropshipping?

Choose your business structure

The first step in running a legal dropshipping business is determining and setting up a business structure.

While any of these structures can be used, we only ever really recommend companies and trusts, and generally we only recommend a trust if the goal is to sell the business. Our starting point for most people is a company structure, however, each option has its costs and benefits and what is right for one person is not for another.

The 4 most common business structures are:

sole trader
partnership
company
trust

Supplier contracts

Products are often sourced through web platform plugins with informal contracts.

Many people go straight into dropshipping using a platform like Shopify or BigCommerce and source products through plugins like Aliexpress and Oberlo. When using these tools the dropshipping contract is fairly loose. Even if it was a formal contract, you would have a hard time enforcing it in China, assuming that’s where you supplier is located. For this reason, you have to be careful about forming contracts with your clients. See below.

As your transaction value increases more formal contracts can be put in place between your company and the supplier. In fact, dropshipping, and contracts which facilitate the process is not new. It’s just expanded rapidly facilitated by technology. A dropshipping contract is just another form of distribution agreement. However, a key feature of a dropshipping contract is that your supplier ships directly to your client.

Your terms of sale

If nothing else, this is the agreement most dropshippers will need to engage a lawyer for.

Where you have a loose agreement with your supplier you need to be careful with your terms of sale. One of the key considerations is the timing of the contract formation. Once you enter into an agreement with your client, you are liable for fulfilling that agreement even if your supplier fails to deliver.

We do not recommend people try and put together the terms of sale for their dropshipping business themselves. If nothing else, this is the agreement most dropshippers will need to engage a lawyer for.

A legally binding contract has three key requirements:

Consideration – For example, payment of money in exchange for the delivery of a product.
Intention – That is the intention to enter into a legally binding agreement. Which is presumed if you are offering to sell goods.
Offer and Acceptance – It is offer and acceptance which is crucial to the formation of a contract for dropshippers. Ideally you do not want to conclude a contract until you are certain you can deliver on your promise. Which for dropshippers is dependent on your supplier.

Australian Consumer Law

You cannot exclude the consumer guarantees

The Australian Consumer Law contains guarantees which cannot be contracted out of. Even if you write in capital letters “WE ARE NOT LIABLE FOR ANYTHING EVER”, you are still liable. In fact, making a statement like this is likely a breach of section 29 of the Australian Consumer Law, which states:

29 False or misleading representations about goods or services

(1) A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services:

(m) make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy (including a guarantee under Division 1 of Part 3-2).

Making such misleading statement incurs penalties if the Australian Competition and Consumer Commission take aim at you. This is another reason why you should have your terms of sale drafted by a lawyer who understands both dropshipping and consumer law.

Furthermore, dropshippers need to take care to ensure the supplier will deliver the products purchased to their customer. The Australian Competition and Consumer Commission took legal action against Ozdirect, and its director, for misleading and deceptive conduct associated with selling goods which it did not have a reasonable ability to deliver.

Copyright issues

Where do the images come from?

For those using plugins like Oberlo you are pretty much reliant on the images which the supplier provides. Someone owns the copyright to those images. The question is who? In most cases it is reasonable to assume, a supplier of a product, who provides you with an image, is licensing the use of that image to your business for the purpose of selling the product. However, this assumes the supplier owns the copyright or has the right to sub-licence it to you.

We have come across circumstances where dropshippers have been issued with copyright infringement threats for using images which were provided to them by the supplier. If you receive a threat like this, you should contact a lawyer for advice. Sometimes this is just other dropshippers trying to knock out their competition. That said, making false allegations of copyright infringement are prohibited and may attract an award of damages against those making the allegations.

Privacy

Privacy policies and the GDPR

If you are not exempt under the Privacy Act 1988 (Cth), then your business is required to have an up to date privacy policy. Even if you are exempt, customers generally expect to see one. Additionally, if you are involved in a data breach, then a privacy policy can serve to reduce any reputational damage your business suffers.

If you are selling into the European Economic Area or to European Union (EU) citizens, then the EU General Data Protection Regulation (GDPR) may apply to your business even though it is based in Australia. Fortunately, there is a lot of overlap between the GDPR and the Australian Privacy Principles.

Offshore service contracts

Consider privacy, confidentiality and intellectual property ownership

If you are outsourcing business processes offshore, then you also need to consider including confidentiality and privacy obligations in the service agreement. We have read quite a few service agreements from small scale outsourcing providers, notably those providing administration services out of the Philippines, and these provisions are almost always absent. Typically, these outsourcing agencies should be made to sign a simple services agreement which you provide to them.

Where freelancers are engaged to develop website content, logos or graphic design, a services agreement with Intellectual Property (IP) assignment provisions should also be entered into. Regularly our clients state they would never enforce a low value contract with offshore providers anyway (because of the costs involved).

However, what is important to note is:

Assignment of copyright (including graphics and copy) must be formalised in writing and signed by the original owner, to be effective. If this is done then it is Australian law which dictates the copyright has been transferred, not the foreign jurisdiction.
Having clauses in a service agreement requiring the service provider to deliver original work, which does not infringe another parties copyright, is also important. If some time down the track your business is presented with an infringement notice, such a contract goes to show the infringement was not flagrant. Flagrant infringement of copyright is generally subject to larger penalties.

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IT Lawyers Brisbane can advise across a range of dropshipping legal issues.

Talk to us about dropshipping

Whether you are already operating or interested in getting into dropshipping, contact us for an obligation free discussion about dropshipping legal requirements.

Looking for legal advice about Dropshipping?

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