Every Australian online retailer that runs on a dropshipping model should know the name Ozdirect. Ozdirect Online Brands Pty Ltd was a business that took customers' money for goods its suppliers had quietly stopped dispatching, blamed the delays on a sudden surge of orders, and promised refunds it had no intention of giving. When the Australian Competition and Consumer Commission (ACCC) took the company to the Federal Court, the case became one of the clearest Australian illustrations of an uncomfortable truth: dropshipping is legal, but it is very easy to run it illegally. The story of how Ozdirect crossed the line, and where exactly that line sits, is what this article sets out.
The Ozdirect story
Ozdirect Online Brands Pty Ltd, the company at the centre of the ACCC's Federal Court action in Australian Competition and Consumer Commission v Ozdirect Online Brands Pty Ltd [2009] FCA 1604, ran a group of online stores, including ozdirect.com and ausbuys.com.au, selling consumer goods to customers across Australia. It operated on a pure dropshipping model. Customers paid the full price up front, Ozdirect forwarded the order to one of its suppliers, and the supplier packed and posted the goods directly to the customer. Ozdirect never held the stock itself. The business was run by Paul Albright, its sole director, secretary and managing director, who was also named in the proceedings.
The problems began with money, not with the model. Ozdirect bought from its suppliers on credit, and its arrangements gave suppliers the right to place it on credit hold when it exceeded its credit limit, either by owing outstanding invoices or by ordering more than its limit allowed. While on credit hold, a supplier was under no obligation to dispatch anything until Ozdirect had paid its invoices down. Between around September 2008 and July 2009, Ozdirect kept accepting orders and payments while it was on credit hold. Goods did not arrive at all, or arrived long after the delivery times Ozdirect had advertised, including statements that goods would be dispatched within a minimum of six days.
When customers chased their orders, Ozdirect told them the delays were caused by a large influx of orders creating a backlog at its suppliers' warehouses. That was not true; the real cause was the credit hold. Its refund practices were worse. The terms on its websites said that any refund Ozdirect was obliged to give would be issued only as a credit note to be spent on further purchases. It told customers it would not refund them until it had itself recovered the money from the supplier, that cash refunds required a second request, and in at least one case that the ACCC had a policy allowing all businesses 30 days to provide refunds. It also said it could refuse to refund for faulty or defective goods unless the customer gave written notice within three days of receiving them, and it instructed staff not to refund customers who had initiated credit card charge-backs through their bank.
The case was decided under the Trade Practices Act 1974 (Cth), the predecessor of the Competition and Consumer Act 2010 (Cth), which now carries the Australian Consumer Law (the ACL) as Schedule 2. The modern provisions are the ones a dropshipper needs to know today, and they are set out below.
What the Federal Court decided
The question for the court was whether Ozdirect's conduct, taken as a whole, fell foul of the consumer protection provisions of the Trade Practices Act. The court made declarations that it had contravened the Act in three ways that matter for any dropshipper.
First, Ozdirect accepted payment for goods when there were reasonable grounds, of which it knew or ought to have known, for believing that it would not be able to supply them within a reasonable time. That conduct is now caught by s 36 of the ACL, which prohibits wrongly accepting payment. The section bites whether or not the seller intends to deceive anyone: it is enough that there are reasonable grounds for believing the goods cannot be supplied within the advertised period, or within a reasonable time if no period was stated.
Second, Ozdirect's representations about dispatch times, the causes of delay and its refund policies were misleading or deceptive. That is now prohibited by s 18 of the ACL, and the specific false statements about the existence, exclusion or effect of a right or remedy, such as the claim that refunds could be limited to credit notes, are now caught by s 29(1)(m) of the ACL.
Third, the court dealt with the terms of Ozdirect's contracts. Terms that purported to restrict refunds to credit notes, or to impose conditions such as three-day notice periods for faulty goods, were ineffective. Consumer rights of the kind in question cannot be excluded, restricted or modified by contract. Under the current law that protection is found in s 64 of the ACL, which renders void any term that purports to exclude, restrict or modify the consumer guarantees. In other words, a refund policy in a website's terms and conditions cannot override the rights the law gives consumers.
The court ordered injunctions restraining Ozdirect, for a period of five years, from accepting payment for goods while it was on credit hold, or when there were reasonable grounds, of which it knew or ought to have been aware, for believing that it could not supply the goods within a reasonable time. Because Albright was knowingly concerned in the conduct, the orders reached him as well. Contraventions of these provisions can also attract pecuniary penalties under the ACL, which is one reason the ACCC's enforcement attention is not something a business wants.
The reasoning that transfers to other businesses is straightforward. The dropshipping model was not the problem, and the court did not treat it as one. What mattered was Ozdirect's state of mind when it took the money: it knew, or ought to have known, that the goods would not arrive in a reasonable time. What mattered next was what it told customers: the dispatch promises, the excuse about backlogs, and the refund assurances were all false.
What this means for your dropshipping business
If you sell in Australia on a dropshipping model, the Ozdirect case is not a curiosity. It describes the risks of your operating model in detail. Here is why it matters to you:
- Your customers contract with you, not your supplier: The person who pays you is buying from you. If the parcel never arrives, or arrives late, the complaint, the refund and the liability sit with you, whatever the supplier did.
- The consumer guarantees apply to everything you sell: Goods must be of acceptable quality, fit for their purpose, match their description and be supplied within a reasonable time. The right to a refund, repair or replacement when goods fail these guarantees cannot be contracted out of under s 64 of the ACL.
- Delivery promises are legal representations: An advertised dispatch window, or an automated email saying an order is on its way, can be misleading or deceptive conduct if it is not true, under s 18 of the ACL.
- Taking payment you cannot fulfil is itself a contravention: Even without any lie, accepting money when there are reasonable grounds to believe you cannot supply within a reasonable time breaches s 36 of the ACL.
- The ACL reaches overseas sellers too: The law applies to all businesses selling goods into Australia, including businesses based overseas, and non-resident businesses that sell low-value imported goods, with a customs value of A$1,000 or less, into Australia generally must register for, collect and remit GST on those sales.
The practical difficulty the case exposes is that a dropshipper's supplier can fail silently. A supplier can go on credit hold, run out of stock or simply stop dispatching, and none of that is visible from your side until customers start complaining. By then the payments have been taken and the delivery promises have been made, which is precisely the combination the ACL punishes. The ACCC has also made clear that it treats consumer guarantee compliance as a priority and uses complaints from the public to inform its education, compliance and enforcement work, so the risk is not theoretical.
None of this means dropshipping is off limits. It means the model only works when you can honestly make the promises the law cares about: that you will supply the goods, within the advertised time, and that you will honour consumer guarantee rights if something goes wrong. That depends on suppliers you have vetted and contracts you can enforce, and on a refunds process you actually run.
If you are running a dropshipping operation, there are concrete steps you can take this week to stay on the right side of the line the Ozdirect case drew:
- Vet each supplier before you list their products: Check their financial position, their dispatch performance and their order limits, because a supplier on credit hold is exactly the failure the Ozdirect case punished.
- Only take payment you can reasonably fulfil: If a supplier cannot guarantee dispatch within your advertised window, take the product down or extend the promise before you accept the order.
- Audit your refund and returns promises: Any term that limits refunds to store credit, or imposes conditions on refunds for faulty goods, is void under s 64 of the ACL and is itself a false representation risk.
- Check what your automated emails actually say: If your delay notices blame supplier backlogs, make sure that is the real reason, because the court treated Ozdirect's backlog excuse as a separate contravention.
- Confirm your GST and importing position: If you sell low-value goods imported from overseas, confirm whether you need to register for GST, and take advice on your supply chain.
Getting a lawyer involved before a regulator does
The point of engaging a lawyer early in a dropshipping business is that the Ozdirect case was not won or lost in the courtroom. It was lost in the months of accepting orders and sending excuses, long before the ACCC filed its proceedings. Most of that conduct is avoidable with the right documents and processes in place, and that is where professional help earns its keep.
A commercial lawyer can help a business in the position Ozdirect found itself in, or one that wants to avoid it, in several ways. They can draft and negotiate supplier agreements that lock in dispatch timeframes, quality standards, rights over any branding and packaging, and indemnities for consumer guarantee claims, so that the failures of an overseas supplier do not land entirely on your books. They can review your website terms, refund policy and marketing copy against the ACL, so the promises on your site are promises you can actually keep. They can advise on which country's law applies when your supplier is overseas, and on product safety and import obligations that apply to the goods you sell. And if the ACCC or a state regulator does come knocking, they can manage the response and any dealings with the regulator.
The benefit of doing this before problems arise is that consumer law compliance in a dropshipping business is largely a paperwork and process exercise. It is about contracts that hold your suppliers to their promises, terms and conditions that respect the consumer guarantees, and communications that tell the truth about dispatch and refunds. Those are all things a lawyer can put in place quickly, and they are all things that become much more expensive to fix after a regulator takes an interest.
The line the Ozdirect case draws
The line this case draws for every Australian dropshipper is this: the model is legal, but taking money for goods you know you cannot deliver in a reasonable time, and telling customers whatever is convenient about why, is not. Ozdirect's undoing was not that it dropshipped. It was that it kept selling while its suppliers were refusing to dispatch, and then dressed up the failure with excuses and credit-note refund policies.
If you take one set of steps from this article, make it these: vet your suppliers before you list their products, only take payment you can reasonably fulfil, and audit your terms, your refunds process and your customer communications so every promise you make is one you can honour. The consumer guarantees apply to everything you sell regardless of how the goods reach your customer, delivery promises are representations under the law, and wrongly accepting payment is a contravention in its own right. If any of that is unclear, or if you are setting up a new dropshipping arrangement, speak to a commercial lawyer who can review your supplier agreements, website terms and refund policies before a regulator finds you first.