Explained: Dropshipping Contracts
A dropshipping agreement contract essentially governs a retailer’s outsourcing of the step of carrying inventory to a supplier. In other words, it is the control mechanism governing the retailer’s business model of not holding inventory and just moving the order to the next e-commerce stage of fulfillment and delivery. It is typically a contract between an e-commerce retailer and supplier/manufacturer, and it also typically aims to outline basic terms related to purchases, sales, shipment, warranty, etc. , which are to be negotiated by the parties whenever they buy + sell or take orders + fulfill orders.
An e-commerce retailer is often looking to have a "no or minimal investment" approach to inventory, i.e., to partner with a supplier so the retailer only orders a product once it has been ordered by the end buyer and then the supplier executes delivery. This is a great business model because in theory, the retailer doesn’t have a financial investment in any inventory until it has been sold. Well, that’s true but there is always a rub – in this case it is the dropshipping agreement contract.
Contract Clauses in Dropshipping Agreements
Another key part of a dropshipping agreement is the specific terms and conditions for the dropshipping relationship. Some of the issues that need to be addressed in the agreement are:
Payment terms – the payment method for the products, when does payment have to be made, if payment is made through a third party who is responsible and who is liable for payment issues, etc.
Product sourcing – how the products will be sourced, is there an approved list of providers or can "any" supplier be used.
Shipping and handling responsibilities – is the dropshipper handling shipping or is the supplier or provider required to do so, and how is that expense (of shipping) divided between the parties (or is it divided at all).
Liabilities – what are the liabilities for the parties in different circumstances regarding products, payments, defaults, etc.
A dropshipping agreement is a very important part of a successful dropshipping program and needs to be carefully crafted to protect both parties. If you are considering entering into any type of dropshipping agreement, you should first consult with an experienced business contracts attorney in your state.
Dropping Goods, Not Dropshipping Contracts
When drafting a dropshipping agreement, there are several legal considerations you need to address to ensure that both the supplier and seller are protected. Jurisdiction and Governing Law – it is essential to determine the jurisdiction of the dropshipping agreement. This is the physical area where the agreement is enforced. Where an issue might arise, having a known jurisdication in the agreement will make it easier to solve. For example, if you import and sell products in New Zealand, then you should have jurisdiction in New Zealand.
Dispute Resolution – an important consideration for every dropshipping agreement is how to handle disputes. A dispute resolution clause in a dropshipping agreement provides a clear process for handling disagreements. A good dispute resolution clause will often outline the specific process, the forum (e.g., court vs arbitration), and the governing law.
Compliance with Laws – since dropshipping can cross borders, ensuring that the dropshipping agreement complies with all relevant laws in the jurisdiction is critical. All parties need to ensure that they follow the law and the dropshipping agreement can help clarify specific obligations. For example, if the dropshipping business needs a license, it should be stated. Otherwise, the supplier could face fines and legal issues if it’s on the seller’s side that the responsibility lies.
Tailoring Your Dropshipping Contracts
One aspect of contracting for a dropshipping business is the ability of both parties to customize their agreement to meet their respective needs, which are often very different. For instance, the manufacturer may limit the dropshipping agent to only selling certain categories of products or a certain product line. Be sure that there are no inadvertent limitations that may bind the party longer than intended (which might have been intended by the other party). A dropshipping arrangement may be exclusive to the dropshipping agent or to the manufacturer . As seen earlier regarding non-compete clauses, the parties must be careful to avoid an "evergreen"-type contract where the non-compete blocks the other party from selling similar products after termination of the agreement. Instead, the non-compete should tie the start of the non-compete period to the end of the agreement and even make the non-compete last for a specified time after termination, if warranted.
As the dropshipping business grows, parties often adjust their agreements to allow for greater volumes, unique pricing terms, more involved delivery or drop-off arrangements, payments for unused product or inventory, and the like. Be careful to keep track of the changing events and to include them as amendments to the original dropshipping agreement.
Errors in Dropshipping Contracts
One common misstep is when the contract states that the seller exclusively markets the product. As obvious as this may seem, it does happen and it is important to know what recourse you have if they begin selling from the same outlet.
Another mistake is entering into a contract without specifying duration. If there are no guidelines on how long the agreement lasts or under what circumstances it can be canceled, the risk is that they can cut you as a buyer with no warning.
Another issue is not stipulating whether your dropshipper reserves the right to sell to anyone else. While it is often assumed that the dropshipper will not undercut you on your prices, you may find out otherwise simply because you did not include a clause in the agreement.
These are just a few examples so it is crucial to read any dropship agreement carefully before signing.
The Effects of Dropshipping Contracts on Your Partnership
A well-crafted dropshipping agreement is one of the most effective ways to establish trust with suppliers and retailers. The more clear the contract terms are, the easier it is to create a business relationship based on transparency and respect. One of the most important aspects of a dropshipping contract is that it sets forth the relationship that the parties are establishing. Does the retailer truly consider itself an agent or just an affiliate of the supplier? Is the supplier actually providing the product to the customer or is the retailer responsible for the transaction? Creating a clear chain of obligation and expectations can help quell many future disputes and misunderstandings . Though parties can engage in informal relationships and still create a beneficial partnership, a handshake isn’t sufficient when it comes to business matters; especially when it concerns larger agreements between suppliers and retailers. Think of the dropshipping agreement as the benediction to a marriage alliance – it’s the final say on whose responsibilities lie where and how payments will be processed. When two parties enter a business partnership based on trust and communication, the relationship will most likely prove to be long and prosperous.
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