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Contracts are an essential part of running a successful business. If you are a dropshipper (somebody who sells goods from another supplier directly to the customer), you may be wondering what the best contractual agreement is for your circumstances. All contractual agreements contain a benefit to both parties. These agreements usually underpin a transaction or some form of business dealing. They are legally binding as the courts can enforce the agreement if either party does not uphold their responsibility. Contracts are also used to govern relationships between entities. For example, you could use a contract to govern the relationship between a manufacturer and a retailer. However, there are various forms that these agreements could take. This article will explain why implementing a dropship agreement is better than an agency agreement for online stores.

What is an Agency Agreement?

An agency agreement sets out an agent-principal relationship. This means that the agency agreement will authorise one person (the agent) to act on another person’s (the principal’s) behalf in particular matters. The agent can make certain decisions about their principal and will have specific fiduciary responsibilities. This means that they must act in their principal’s best interests. 

A common example of an agent-principal relationship is an athlete and their agent. With this business model, an agent will try to get the best deal for their athlete regarding matters like brand sponsorships and public relations. Further, the agency agreement will determine the extent of an agent’s decision making power. 

In addition, an agent can also be used for the sale of goods. A principal can appoint an agent to sell goods on their behalf and the agent may receive a commission for every good sold. The agent must act in the principal’s best interest and cannot be subject to any conflicts of interest. 

What is a Dropship Agreement?

A dropship agreement governs the relationship between a supplier and a dropshipper. Dropshipping is where a person sells goods from a supplier without ever holding the product themselves. Instead, the dropshipper acts as a storefront but does not receive inventory. When the dropshipper receives an order, they will buy goods from the supplier to send to the customer. 

The benefit of a dropshipping business for suppliers is that they do not need to market or sell their product as the dropshipper does it for them. The benefit of a dropshipping business for the dropshipper is that they do not need to hold any product, and can make a slight profit from the sale. A dropship agreement will determine the rights and responsibilities of both the dropshipper and the supplier under the contract. 

If you are a dropshipper, a dropship agreement will outline what you can do. This agreement might include limits on the use of any intellectual property that the supplier owns. The agreement might also include a non-compete clause, which means that you cannot dropship goods from any other supplier. The other party could limit this to just suppliers in the same industry or any other supplier. Finally, the dropship agreement could also outline that you must be truthful when advertising the product and avoid any misleading representations.

Which is Better?

A dropship arrangement is usually better for e-commerce than an agency agreement. The main reason why a dropship agreement is better than an agency agreement is that you can stay independent and limit risks. As a dropshipper, you do not lose anything if you only have a few orders as you are not holding any product. If you were an agent, you also would not lose anything if you had low orders. However, you would not have the same independence. This is because an agent must be working in the best interests of their principal. 

Another reason why a dropship agreement is better than an agency agreement is that when you are an agent, you do not receive the money from sales yourself. If you sell a good as an agent, you must give this money back to the supplier. Then, the supplier may give you a cut or keep you on a retainer. A retainer is where the supplier pays you a fixed regular payment to access your skills and services on demand. However, if you sell as a dropshipper, you can keep all the money you receive from customers.  

Key Takeaways

A dropship agreement is a better option than an agency agreement when it comes to selling goods online. The main reason is that you do not need to hold any goods as a dropshipper, and you are independent of your supplier. You will never be stuck with an old product as you merely act as a middleman between the supplier and the customer. However, the dropship agreement will govern this relationship and set boundaries on how you can act. As a dropship agent, you have a duty to act in good faith and the best interests of your supplier. Any sales you make on behalf of your supplier flow back to them. You will then either be given a commission or be required to invoice the supplier for your work. For legal assistance with managing your contracts, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can anyone become a dropshipper?

Yes, there are no specific rules to become a dropshipper, and any responsibilities you have will be contained in the dropship agreement.

What happens if I breach a non-compete clause?

Your supplier will be entitled to terminate the agreement, and they may be able to sue you for any loss incurred. 

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