Written by Marlysa Razak and Jeremy Ling

Introduction

For most, 2020 has not been the best of years. However, this was not the case for Kamil Sattar. At the age of 20, Kamil became one of the youngest members of Forbes Business Council. He was scoped and hand-picked by a review committee based on the depth and diversity of his experience as an entrepreneur in the lucrative dropship industry. The dropship model encourages aspiring entrepreneurs to experiment with different business ideas with limited repercussions. E-commerce giants such as eBay and Amazon are among the countless examples of companies capitalising the business opportunities that dropship brings forth.

Many entrepreneurs in Malaysia have followed the footsteps of Kamil Sattar by venturing and getting involved in dropshipping. With the rise of ecommerce platforms, also more commonly known as “online shopping”, it is not surprising that many Malaysians, young and old entrepreneurs, seize the opportunity to become dropshippers for major manufacturers, retailers and suppliers.

What is dropship?

Dropship is an ecommerce model introduced to facilitate warehouse retailers to connect to buyers or customers directly through the third party who acts as the mediator or intermediary. In the context of dropshipping, ‘supplier’ refers to the party, usually a wholesaler or manufacturer, that possesses the inventory and stocks. A dropshipper, on the other hand, would be the agent that bridges the customer and supplier – in the eyes of the customer, a dropshipper is the ‘seller’ but in the eyes of the supplier or retailer, a dropshipper is the ‘buyer’. For the ease of reference in this article, a dropshipper will be referred to as the ‘seller’. 

Generally, in dropshipping, the seller uses online platforms to make sales of the products and to promote the products to the customers. However, the seller does not keep the stocks or the products on their own, instead outsources the package, items, shipment and delivery to the supplier. This can be summarised in the illustration below:

 

Why dropship? 

To put it simply, dropship is a retail fulfillment method where a store or seller does not possess inventory of the products and does not concern themselves with the handling and supply chain of the goods, instead focuses on the sales and marketing of the products. As mentioned above, the seller plays the role as the intermediary, placing bookings and orders to the supplier without ever handling the stocks themselves, however owes the obligation to ensure delivery of the products to the customers. This is essentially the biggest difference between dropshipping and the standard retail model, which can also be identified as its biggest appeal. 

Traditionally, retailers are required to purchase huge amounts of inventory up front to launch their business. The dropshipping model removes this hurdle and places entrepreneurs in a better position financially, as they are not required to purchase a product unless they have already made a sale. As a result, a venture into the business of dropship poses a smaller risk as compared to a traditional brick-and-mortar business. 

Why not dropship?

With that being said, dropship is not without its flaws. Due to its lucrative nature, the market is saturated with dropshippers and has become highly competitive. Businesses that are pitted against one another would sell their products at rock bottom prices in an attempt to grow revenue. Bigger companies are able to reduce their markups to offer the lowest prices while smaller dropship businesses must cut into their profits to remain competitive in the market. This becomes unsustainable at a certain point. Additionally, profits from ecommerce are largely dependent on traffic. Without a regular client base and a limited customer reach, businesses will struggle to generate profit. 

Legality of Dropship

To date, there are no legal red flags on dropshipping and it is not illegal. There are no express laws prohibiting dropshipping, either in Malaysia or any other countries actively participating in the industry. However, there are also no express laws allowing or regulating such arrangements. Dropshipping seems to be governed and regulated by the basics and traditional laws of contracts and logistics as well as the laws of agency to some extent. 

In most dropshipping arrangements, the relationship between the supplier and the seller is regulated by the contract or agreement executed by them. Major ecommerce platforms such as AliExpress, Amazon, eBay and others have also recognised and allowed dropshipping within their platforms, however with strict terms and conditions to be complied with by the seller. For example, Amazon does not allow the seller, who is a dropshipper, to sell any items from suppliers such as Amazon itself or suppliers inside the platform.

In Malaysia, there are no sets of regulations or laws specifically regulating the dropshipping industry. Sellers and suppliers have their freedom and discretion to regulate their relationships. To establish and regulate this relationship, the seller and the supplier may want to consider the following clauses:

  1. Liability and Limitation of Liability
  2. Duties and Obligations as a Seller and as a Supplier
  3. Damage to Goods
  4. Delay in Delivery
  5. Relationship between parties
  6. Method and Calculation of Commission
  7. Refund and Cancellations 

Legal Issues in Dropship

With that being said, several legal issues must be considered.

As mentioned in the earlier part of this article, the seller does not control the products. The seller is mainly concerned with sales and marketing for the products, but not manufacturing, delivery and supply of the products. This being said, the seller may not be aware of any copyright issues attached on the products, i.e sale of counterfeit products. In this circumstance, the seller may not escape liability for the breach committed by the supplier. 

For example, if a supplier has illegally used a trademarked logo of another company, or are manufacturing replicas of the intellectual property of others, the seller would automatically be a complicit in the same crime. This is especially evident in products such as counterfeit phone accessories where pop culture (eg. Marvel superheroes, sports teams, etc.) have often been capitalised without permission from the brand or intellectual property owner. 

Consequently, sellers must remain vigilant in scoping out the suppliers of products they wish to engage, as the legal consequences of utilising the intellectual property of another would leave a permanent stain on their reputation. They may even get their websites blacklisted and ultimately blocked from operating.

Most of the time, a customer is required to provide personal details such as their names, addresses, and bank details upon placing an order online. As sellers, it is important to remember that there must be adherence to data protection laws when there is an intention to collect the personal data of their customers. In Malaysia, the Personal Data Protection Act 2010 (PDPA) serves to regulate and strengthen the protection of customer’s data in e-commerce transactions. The PDPA contains a list of seven principles which stipulates the manner in which businesses are to handle the personal data of others. A seller must comply with the PDPA to not only prevent customers from filing a lawsuit against them, but to also gain their trust in the long run. 

Additionally, although this is not necessary, dropship businesses may also consider including refund policies and an accompanying list of terms and conditions to manage their returns and exchanges. This allows for customers to understand their rights and the steps they can take if they have received goods that are faulty or in an undesirable condition. It also serves as an additional layer of protection against legal actions.

Owing to the unique business relationship between transactions, dropshippers or sellers are often left with the question as to the potential liabilities they are open to. Most of the time, sellers source their products from wholesalers out of their home country, such as AliExpress. This may raise the opportunity for product defects due to differing regulations in production as well as the handling during shipping. In the event that a customer receives a defective product, being the customer’s point of contact within this transaction, sellers often worry whether they would be liable for the damages suffered by the customer. 

In Malaysia, dropshippers ought to familiarise themselves with Part X of the Consumer Protection Act 1999 (CPA), as it contains provisions relating to product liability. While Section 67 defines what constitutes a defective product, Section 68 laid down the parties that would be liable for the damage, namely: (a) the producer of the product; (b) the person who, by putting his name on the product or using a trade mark or other distinguishing mark in relation to the product, has held himself out to be the producer of the product; and (c) the person who has, in the course of his business, imported the product into Malaysia in order to supply it to another person. 

Conclusion

All things considered, the dropship model’s greatest appeals have often turned into its biggest challenges. Entrepreneurs that are interested in starting their own dropship business must be aware of the legal precautions they ought to take to prevent potential liabilities. With that being said, a seller that has done his due diligence and taken the right steps will definitely have the potential to reach the heights that Kamil Sattar has.

References


Uploaded on 11 february 2021

Photo by Markus Spiske on Unsplash

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