The Legal Pros and Cons of Dropshipping

If you’re setting up an online business involved in the sale of goods, you’ll likely be spending a great deal of time and effort analysing and planning the supply and fulfilment side of your business. In doing so, you may be considering the various supply and fulfilment options available to you and the pros and cons of each.

One of these options, which has generated a lot of interest over the last few years, is ‘dropshipping’. You may or may not have heard of dropshipping or considered it a potential route for your new business. However, in this article, we’ll discuss this topic in detail and touch base on some of the main upsides, downsides and legal considerations involved.

What is dropshipping?

Dropshipping is a product supply and fulfilment model in which an online retailer doesn’t hold any inventory but instead markets and sells the products to customers.

Once a customer order is received, the retailer immediately places a matching and corresponding order with their dropship supplier, holding all the inventory. The dropship supplier then fulfils the order on the retailer’s behalf and sends the order out directly to the customer.

Typically, the customer will be unaware of the dropship supplier’s involvement and will presume that the order has been fulfilled in a conventional manner. It isn’t uncommon for the packaging to bear only the retailer's name.

Why is dropshipping an attractive option for many startup e-commerce businesses?

The dropshipping model can be very appealing to new online businesses as it requires zero upfront costs associated with acquiring and housing inventory.

As such, it heavily decreases the capital outlay and risk associated with the venture. It also allows the business to be very nimble in pivoting between products, rather than being burdened by slow-moving stock, putting a drain on cash flow and taking up valuable warehousing space.

What are the legal considerations associated with dropshipping?

Since you don’t hold or own the stock as a dropshipper, you must be careful about not potentially misleading consumers, such as by giving absolute assurances as to, e.g. the stock levels and delivery times etc., which may in some cases be entirely outside of your control.

You must also be aware that, as the retailer, you’re still primarily liable to your customer for the product you’ve sold to them, including by meeting the implied terms in the Sale of Goods Act 1979 (when selling to businesses) or the Consumer Rights Act 2015 (when selling to consumers).

This includes the responsibility to the customer to ensure the goods are of satisfactory quality and are fit for purpose. If the products you’re selling fail to meet the conditions of the CRA, your customers can (amongst other rights) reject the goods, and you must refund them. You can’t exclude any of these conditions when selling to consumers. 

Likewise, if the products are proven dangerous or hazardous, you can be held liable for this. As such, you should consider obtaining suitable product liability insurance to help protect you, regardless of any claim you may have against the supplier or manufacturer in these circumstances.

Also, as the retailer, you are legally responsible for ensuring the quality of the goods until they arrive with the customer. Naturally, this does need to be borne in mind when dropshipping. 

You should ensure that you’ve an appropriate contract with your supplier to cover areas such as the above so that it’s clear where both parties stand in case of any legal issues.

Who owns the intellectual property rights of the products?

This largely depends on what you’re selling and the arrangements you’ve agreed with the relevant supplier/manufacturer. As a customer-facing retailer, it’s usual for you to trademark a name for your online shop and all the branding surrounding that.

If the products you’re selling are labelled, packaged and sold under your brand name (often known as ‘private labelling’), then it would usually be the case that you’d own the IP in those products. In this arrangement, the supplier merely fulfils the order to your requirements and applies your branding.

However, some dropshippers choose to sell existing branded products with no IP of their own, just acting as a conventional retailer shopfront. This is a legitimate business model, provided you’re authorised to sell such branded products.

What are some of the main downsides associated with dropshipping?

One of the principal downsides is the loss of control.

Since you aren’t making, packaging or shipping the products you’re selling, you need more control over the fulfilment side of the process. You’re just taking the order, and from thereon in, you depend on your supplier to do the rest.

As such, your customer experience is also outside of your hands. This makes it challenging to grow a successful business in the long run.

For this reason, it isn’t uncommon for your new e-commerce businesses to start out using the dropshipping model to get started and then, over time, progress to holding their own inventory to dictate the customer experience better.

Quality control can also be an issue, mainly if you sell lower-value, mass-produced items or items you haven’t been personally involved in the design and manufacturing approval process. Again, this can damage the customer experience and be a source of negative reviews.

Wrapping up

Dropshipping can be an attractive option for startup e-commerce businesses due to its low, upfront costs and flexibility.

However, legal considerations must be taken into account, such as potential liability for product quality and customer satisfaction.

If you’d like advice and support regarding setting up a new dropshipping business, or the relevant contracts involved, you should reach out to a commercial lawyer or consumer lawyer with appropriate expertise.

LawBite experienced lawyers can help you with all commercial and corporate legal matters related to ecommerce.

About the author

Ashley Gurr is a commercial and business lawyer at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on commercial contracts and a multi-national utility giant in a contract strategy role.