Drop shipping lets an online store sell goods it never holds. When a customer orders and pays on your website, you place a matching order with a supplier, and the supplier packs the goods and sends them straight to the customer. You never touch the stock, so you avoid warehousing, picking and packing costs, and you can offer a much wider range than you could ever store yourself.
The catch is that the arrangement creates two separate contracts, and consumer law treats them very differently. You sell to the customer; the supplier sells to you. Most of the legal risk lands on your side of the first contract. This article explains how a drop shipping arrangement works, why the Australian Consumer Law makes you answerable to customers for problems caused by your supplier, where your own protection against the supplier comes from, and what the written agreement between you and the supplier needs to cover.
The three parties and how an order flows
Every drop shipping arrangement involves three parties:
- The customer: orders and pays for goods on your website or storefront, and expects delivery from you.
- Your business (the seller): takes the customer's order and payment, and is the party the customer contracted with.
- The supplier: holds the stock, and packs and dispatches the goods to the customer on your instructions.
The mechanics are simple. A customer places an order and pays you. You pass a mirror order to the supplier, usually through an automated feed or a portal. The supplier picks, packs and ships the goods directly to the customer, and you pay the supplier its wholesale price, typically after the order is placed. The customer generally does not know that a third party shipped the goods, and in many cases the packaging does not reveal it either.
Two contracts sit behind that flow. The sale contract is between you and the customer. The supply agreement is between you and the supplier. There is no contract between the supplier and the customer, and that is the single most important structural fact about drop shipping: every obligation the customer is owed runs through you.
Why the consumer-law risk sits with you
Because the sale contract is between you and the customer, you are the supplier of the goods for the purposes of the Australian Consumer Law (ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth) (the CCA). The ACL implies a set of consumer guarantees into every supply of goods to a consumer, automatically, whether or not your website terms mention them. The guarantees that matter most in a drop shipping context are:
- Acceptable quality: goods must be fit for the purposes for which goods of that kind are commonly supplied, acceptable in appearance and finish, free from defects, safe and durable, judged by what a reasonable consumer would regard as acceptable (s 54 of the ACL).
- Match description: goods supplied by description must correspond with the description (s 56 of the ACL). Your product listings, photos and specifications are the description, so a listing that overstates the product is breached the moment the customer receives something else.
- Fitness for purpose: goods must be reasonably fit for any purpose the customer disclosed and any purpose you represented they were fit for (s 55 of the ACL).
These guarantees cannot be contracted out of. Under s 64 of the ACL, any term of a contract that purports to exclude, restrict or modify the guarantees, or your liability for failing to comply with them, is void. A "no refunds" policy, a "sold as seen" disclaimer, or a clause that tries to direct the customer's complaint to your supplier will not bind the customer.
If a guarantee is breached, the remedies in ss 259 and 260 of the ACL run against you. The customer can require you to repair or remedy the failure within a reasonable time. If the failure is major, or cannot be remedied, the customer can reject the goods and demand a refund, or claim compensation for the reduction in value. The customer can also claim damages for loss that was reasonably foreseeable, such as the cost of a replacement item or wasted delivery charges. A failure is major if, among other things, the goods depart significantly from their description or are substantially unfit for their common purpose.
None of this turns on fault, and none of it turns on who physically shipped the goods. If the supplier sends the wrong item, a defective unit or nothing at all, the customer's claim runs against you. The ACCC's online selling guidance makes the same point from the other direction: when a consumer buys from a seller on a marketplace, the consumer's rights are against that seller, not the platform or any fulfilment partner.
The Federal Court has applied exactly this logic to a drop shipping business. In Australian Competition and Consumer Commission v Ozdirect Online Brands Pty Ltd [2009] FCA 1604, the seller's suppliers put it on credit hold when it fell behind on payments, so goods stopped being dispatched. Ozdirect told customers the delays were caused by a large influx of orders creating a backlog at its suppliers, when the real cause was the credit hold. Its refund policies also tied refunds to first receiving a refund from the supplier, and it refused refunds for faulty goods unless the customer gave written notice. The Court declared the conduct misleading or deceptive under s 52 of the Trade Practices Act 1974 (Cth), the predecessor of s 18 of the ACL, and restrained the practices for five years. The case shows both traps in action: blaming your supplier does not answer a customer, and a refund policy that makes your refund depend on your supplier's refund is itself likely to mislead.
The ACL also does not care where your supplier is based. If you sell to customers in Australia, you owe the consumer guarantees even when the goods ship from overseas, and the ACCC has confirmed that an overseas business selling directly to Australian consumers must follow the ACL as well.
The gap between you and your supplier
Here is the asymmetry that surprises most drop shippers. The consumer guarantees protect consumers, and you are not a consumer when you buy from your supplier. Section 3 of the ACL defines who counts as a consumer, and s 3(2) provides that a person is not a consumer if the goods were acquired for the purpose of re-supply. Because your wholesale purchase exists to be resold, the consumer guarantee regime does not apply to your supply agreement. The guarantees do not flow up the chain, so when a customer returns faulty goods to you, you cannot simply hand the claim to your supplier and rely on the ACL to force a refund.
That does not leave you defenceless, but your protection has to be written into the supply agreement rather than assumed. The main tools are:
- Contractual warranties: the supplier warrants that the goods match the descriptions you will publish, are free from defects, comply with applicable safety standards and are fit for their intended purpose.
- Indemnity: the supplier indemnifies you for the losses you incur dealing with consumer claims, refunds, chargebacks and returns caused by its failures, including your legal costs.
- Misleading conduct: although you are not a consumer, you can still sue a supplier that misrepresents the goods. Section 18 of the ACL prohibits misleading or deceptive conduct in trade or commerce, and s 236 of the ACL lets a person who suffers loss from that conduct recover damages, within six years of the cause of action arising.
- Returns and credits: an agreed process for the supplier to accept returned goods and reimburse you, including the treatment of return freight.
A common edge case is the overseas supplier. Enforcing warranties and indemnities against a supplier with no Australian presence can be slow and expensive, whatever the agreement says on paper. Sellers often manage this risk operationally instead: ordering samples before listing a product, placing test orders, keeping the range to suppliers with reliable track records, and holding enough margin to absorb the occasional refund. None of those steps replaces the written agreement, but they reduce how often you have to rely on it.
What the supplier agreement should cover
A written agreement is the only place where the risk can be reallocated, because the customer's rights against you cannot be moved. The agreement should set out, at a minimum:
- Orders: how orders are transmitted to the supplier, how quickly the supplier must confirm them, and who bears the risk if order data is lost or garbled.
- Product and quality: the warranties described above, sample approval before a product is listed, and a positive obligation on the supplier to tell you promptly about stockouts, discontinued lines and specification changes, so you never sell a product you cannot deliver.
- Packaging: whether goods ship in your branding, plain packaging or the supplier's packaging, whether the supplier includes its own marketing inserts, and how the sender appears on the label.
- Pricing and payment: the wholesale price, currency, shipping and handling charges, how price increases are notified, and when you pay, whether before dispatch, on invoice or on some other trigger.
- Delivery standards: dispatch timeframes, carrier selection, tracking data and responsibility for late or lost shipments, remembering that the delivery time you promise the customer is your promise, not the supplier's.
- Returns and refunds: who accepts customer returns, who pays return freight, how faulty goods are handled, and the credit or replacement process between you and the supplier.
- Liability and indemnity: the indemnity described above, any cap on the supplier's liability, and the supplier's responsibility for claims arising from defective or misdescribed goods, including your refund outlays and chargebacks.
- Termination: notice periods, what happens to open orders when the arrangement ends, and what happens to your product data and listings.
The drafting choices matter as much as the headings. A warranty that the goods are of merchantable quality may not respond to a claim that they were misdescribed on your website, and an indemnity capped at the value of the last invoice will not cover a wave of refunds. A commercial lawyer will review the draft against the consumer guarantee regime, make sure the warranty and indemnity clauses actually respond to the risks described in this article, and check that the order-flow terms do not leave you in breach of the ACL with no right of recourse against the supplier. If the supplier is overseas, a lawyer can also advise on enforceability and on practical alternatives such as a local distributor or an Australian fulfilment partner.
The refund you cannot pass on
When a customer's goods arrive late, wrong or broken, you will pay the refund or replacement, because the consumer guarantees do not admit a defence of "the supplier did it". No website term and no supplier clause can move that obligation to anyone else. What you can control is the upstream arrangement: a supply agreement that carries real warranties, an indemnity that covers refund outlays and chargebacks, agreed returns and credit processes, and a supplier that must tell you before it runs out of stock rather than after you have taken the customer's money. The Ozdirect case shows the cost of getting this wrong, in refunds and in regulator attention alike. Having the agreement reviewed before you list your first product is a small cost compared with the alternative, and a consultation can identify the clauses that will actually protect you with the specific suppliers you use.