Dropshipping agreements and the clauses that protect your online store

Your supplier has just emailed their standard dropshipping agreement for you to sign, or you are about to launch a store with a supplier who has promised to hold the stock and ship each order straight to your customers. Either way, the agreement sitting in front of you decides who carries the cost when an order goes wrong: lost parcels, damaged goods, refund requests and consumer complaints. This article walks through the clauses that matter and the traps that cost online stores money.

A dropshipping agreement is a supply agreement between you (the retailer) and the supplier. Under it, the supplier holds the stock, and when a customer orders through your store, the supplier packs and ships the goods directly to that customer. You never take physical possession of the goods. The agreement binds you and the supplier, but it cannot move your legal obligations to your customers onto the supplier. The consumer guarantees in the Australian Consumer Law (the ACL, Sch 2 of the Competition and Consumer Act 2010 (Cth)) apply to every sale you make, whatever the supplier's document says. What the agreement can do is make the supplier responsible to you for the cost of those obligations.

The clauses every dropshipping agreement needs

Who ships the order: fulfilment and delivery standards

Because you never touch the goods, the supplier's performance is your performance in the eyes of your customer. The agreement needs measurable fulfilment standards, not promises to use "best efforts". A customer who waits three weeks for a parcel will blame your store, not the supplier's warehouse.

Dispatch window: the supplier must dispatch each order within a set number of business days of receiving it, and must tell you when dispatch is delayed.
Tracking and confirmation: the supplier must use a tracked courier service and give you, or the customer directly, a tracking number.
Packaging: goods must be packaged to survive standard courier handling, using plain packaging or your branding as you direct.
Delivery to the customer: the supplier ships to the address your customer provided, and must not include its own invoices, marketing material or other paperwork in the parcel.

State what happens when a standard is missed: a credit against the wholesale price, a service fee, or a right to have the customer's order re-shipped at the supplier's cost. A clause that identifies the breach but not the remedy gives you nothing to enforce.

How the price is set and when you pay

The agreement should fix the wholesale price per unit, the currency (many suppliers quote in US dollars), and the payment terms: prepayment, payment on dispatch, or payment 30 days after delivery. It should also say how and when prices can change, so your margins are not wiped out by a mid-year price rise you only discover on your invoice.

One trap here is Australia-specific. The agreement must not let the supplier dictate the minimum price at which you resell the goods. Resale price maintenance is prohibited outright by s 48 of the Competition and Consumer Act 2010 (Cth), and the prohibition applies even if the supplier is overseas and even if the price direction appears in an informal email rather than the signed agreement. Keep retail pricing yours; the agreement governs the wholesale price and nothing more.

When title and risk pass

Because goods move straight from the supplier to your customer, the agreement needs to be explicit about ownership and risk. Two drafting choices matter.

Title: ownership of the goods should pass to you before dispatch, or pass to the customer on delivery. If title only passes to you once the customer pays, the supplier may claim to own goods that are already on their way to a customer who has paid you.
Risk: loss or damage in transit should sit with the supplier until the goods are delivered to the customer. A term that puts risk on you from the moment of dispatch means you pay for parcels that are lost or stolen in the courier network.

These clauses are short, but they decide who bears a surprising amount of cost in practice. Dropshippers who have signed a supplier's template "risk passes on dispatch" term have found themselves refunding customers for parcels the supplier can show were handed to the courier.

Damaged, defective and missing goods

Every store gets the occasional damaged or missing order, and with dropshipping the customer will complain to you, not the supplier. The agreement should set out a workable process.

Notification: the customer reports the problem to you within a set window (for example, 7 days for damage and 30 days for a missing parcel), and you pass the claim to the supplier.
Replacement or refund: the supplier replaces the goods or refunds the wholesale price within a set number of days, and bears the cost of any return shipping.
Direct handling: where you prefer, the supplier deals with the customer directly, and honours any refund or replacement you have already given the customer in good faith.
Chargebacks: if a customer disputes the card payment and the bank reverses it, the supplier reimburses you where the cause was the supplier's failure to deliver.

The drafting choice that matters is making the supplier's obligation automatic rather than discretionary. "The supplier may replace damaged goods" is a request. "The supplier will replace damaged goods within 5 business days of notification" is an obligation you can rely on.

Consumer guarantees and who wears the ACL risk

This is the clause that most often decides who pays when a customer complains. Under the ACL, the consumer guarantees apply to your sale to the customer: goods must be of acceptable quality (s 54), fit for the disclosed purpose (s 55) and match their description (s 56). When a guarantee is not met, the customer can require you, as the supplier, to fix the problem (s 259), and in the case of a major failure, to refund or replace the goods (s 260). You cannot contract out of these obligations with your customer: a term that excludes or restricts a consumer guarantee is void under s 64 of the ACL.

The position is more serious when you source from an overseas supplier. If the manufacturer does not have a place of business in Australia, you are taken to be the manufacturer of the goods under s 7(1)(e) of the ACL. That means you can owe the manufacturer-level guarantees and face product liability claims as though you made the goods yourself. The Federal Court applied the same idea to an Australian distributor of imported pacemakers in Medtel Pty Ltd v Courtney [2003] FCAFC 151, holding the distributor liable under the equivalent provision of the old Trade Practices Act 1974 (Cth). A dropshipper importing from an overseas supplier stands in the same position: for Australian consumer law purposes, you are the manufacturer of record.

Your customers' rights cannot be written away, but the agreement can push the cost back onto the supplier. Ask for these terms.

Guarantee warranty: the supplier warrants that the goods comply with the consumer guarantees, including acceptable quality and safety.
Indemnity: the supplier indemnifies you for all losses, refunds, damages and legal costs you incur because the goods failed to meet the guarantees, mirroring the statutory indemnity in s 274 of the ACL where it applies.
Cooperation: the supplier agrees to respond to warranty claims within set timeframes and to honour any remedy you have already given the customer.
No limitation: the supplier's own returns and warranty policies do not limit the consumer guarantees, and the supplier will not ask you to tell customers their rights are limited.

Do not rely on the supplier's assurance that "you handle refunds, we handle nothing". The ACCC has pursued online sellers over refund policies that misrepresented consumers' rights. In ACCC v Valve Corporation (No 3) [2016] FCA 196, an overseas games retailer's refund policy was found to mislead consumers about their rights under the ACL, and the ACL applied even though the company was based overseas and its servers were outside Australia. If your storefront tells customers they have no right to a refund, that statement can breach s 29(1)(m) of the ACL regardless of what your supplier told you. The same logic applies to "no returns" messaging on your product pages.

Product quality, compliance and safety

The agreement should make the supplier responsible for the goods being lawful to sell in Australia: complying with Australian safety standards and any mandatory standards for the product category, carrying accurate descriptions and labels, and not being subject to a recall. If a product is recalled, you need the supplier to cooperate with the recall and bear the cost of contacting affected customers. It is also worth asking for evidence of product liability insurance and for a warranty that the supplier owns, or is licensed to supply, everything it ships. An overseas supplier's claim that "products comply with local standards" is not enough; the clause should name Australian standards.

Stock, backorders and product changes

A store that advertises stock it does not have is a store that issues refunds. The agreement should address the situations that cause this.

Stock levels: the supplier keeps agreed minimum stock levels and tells you when a line is running low, so you can pause the listing before customers order.
Discontinuation: the supplier gives you notice before discontinuing a product, so you can take the listing down before it stops being available.
Substitution: the supplier must not substitute a different product without your approval, because goods that do not match their description breach the consumer guarantees.

Intellectual property in your store

You will copy the supplier's product photos, descriptions and possibly its trademarks into your store. The agreement should grant you a licence to use that material on your website and in advertising for as long as you sell the products. It should also protect your side of the relationship: the photography you commission, your branding, your reviews and your marketing material remain yours, and the supplier must not use them without your consent. If you have built a recognisable brand, this clause stops a supplier from repurposing your storefront content to sell to your competitors.

Customer data and privacy

Every order gives you the customer's name and address, which you pass to the supplier for fulfilment. If the Privacy Act 1988 (Cth) applies to your business, you must comply with the Australian Privacy Principles when you collect, use and disclose that personal information. The agreement should confine the supplier's use of customer data to fulfilling orders.

Permitted use: the supplier uses customer details only to deliver the order, not for its own marketing.
No onward sharing: the supplier does not sell or share customer data with third parties.
Security and breach notification: the supplier handles the data securely and tells you promptly if it is breached, so you can meet your obligations under the Notifiable Data Breaches scheme.
Deletion: on your request, and when the agreement ends, the supplier deletes the customer data it holds.

A term that lets the supplier keep and market to your customer database is effectively giving away your most valuable asset, the relationship with your customers, in exchange for nothing.

Term, termination and winding down

Dropshipping relationships end, and the end matters as much as the start. Look for these terms.

Notice period: a reasonable termination notice (30 to 90 days) rather than termination at will.
Open orders: what happens to orders already placed when the agreement ends; the supplier should still fulfil them.
Data: the supplier returns or deletes customer data on termination.
Non-solicitation: the supplier does not contact your customers to sell directly to them after the relationship ends.

Clauses worth asking for

Beyond the core clauses, these are worth negotiating depending on your products and volumes.

Exclusivity: the supplier will not sell the same products to another Australian retailer, protecting your market from being undercut.
Minimum order volumes: if the supplier requires a monthly minimum, you should know the commitment before you sign, not discover it later.
Force majeure: who carries the risk when the supplier's factory, port or courier network fails, and how long you wait before you can cancel.
Governing law and jurisdiction: Australian law and Australian courts should govern the agreement. With an overseas supplier this clause is the difference between enforcing your rights in Sydney and enforcing them in another country.
Dispute resolution: a staged process of negotiation and mediation before either party starts court proceedings, which keeps small disputes out of the courtroom.

How an Artificer Legal lawyer would review your dropshipping agreement

An Artificer Legal practitioner would start by reading the liability allocation, because that is where the money goes. We would push back on clauses that disclaim the supplier's liability for defective goods entirely, that put risk on you from the moment of dispatch, or that require you to tell customers their refund rights are limited. We would insist on a warranty that the goods comply with the consumer guarantees, an indemnity covering your ACL exposure, and a fulfilment standard with a real remedy attached. We would also check the governing law and jurisdiction clause, the data handling limits and the termination provisions, because those are the clauses that bite when the relationship turns sour. The order of negotiation matters too: price and term first, then liability and indemnities, then intellectual property and data.

Who wears the cost when a customer complains

When a customer's order arrives damaged, late or not at all, your storefront takes the hit: the refund, the replacement, the bad review and possibly a regulator's attention. No clause in a dropshipping agreement can move your customer's rights under the consumer guarantees onto the supplier; those rights attach to your sale and cannot be written away. But the guarantee warranty and indemnity clause decides whether the cost of honouring those rights stays with you or flows back to the supplier. That is the clause worth fighting for, and the one worth having a lawyer review before you sign.

To sum up: a dropshipping agreement allocates the practical risks of a business in which you never hold the goods. Fulfilment standards with remedies attached, clear rules on title and risk, a workable process for damaged and missing goods, a guarantee warranty and indemnity that reflect your obligations under the ACL, and limits on how the supplier uses your customer data are the clauses that turn a handshake arrangement into a contract that actually protects your store.