Terms of Use: Why Every Business with a Website (Even a Lemonade Stand) Needs One

What is a TOU and what is it for?

A long time ago, before you could just click on a button and watch whatever you wanted on TV, if you wanted to rent a movie, one of your options would be to go to Blockbuster. To rent from there, you’d sign up for a membership, choose a movie, pay, and leave. The card that came with your membership would describe rules related to renting a movie. In a nutshell, you couldn’t rent to other people, couldn’t make a copy of the DVD, and if you break it, you buy it. In short, rules to be followed. Now, these same kinds of rules are found on just about every website--usually right beside the “about us” and “privacy policy” links in the obscure, finely printed, and hardly-ever-viewed sections of the website.

However, the basic premise remains the same now as it does before with Blockbuster. Terms of Use – also called Terms and Conditions or Terms of Service – are legally enforceable agreements made between the owner of a website service or app and the user. Terms of Use can vary greatly depending on the service provided, but generally include basic ground rules about the type of conduct that is permitted when using the website or app, who is permitted to use the website or app, and limitations on liability and damages.

Do I really need all that, you might be thinking, I only run a small website providing custom donuts?

It would be easy to brush off including Terms of Use on your website or app, particularly if you run a small business since there is no legal requirement to adopt them. However, without a clear Terms of Use, you may open yourself up to litigation or other costly issues. Let’s take a look at these in detail, and how Terms of Use can prevent a worst case scenario:

1. Limitation of liability

Terms of Use are crucial in limiting a business’s liability. Without clearly stated limits on what users can or cannot seek damages for, a business leaves itself open to very costly litigation.

In our custom donut shop example, let’s imagine that the owner has neglected to include a Terms of Use on his donut business website, Donut Forget Me. A customer, Ann, places a larger order for donuts and pays the bill online. A few days later, Ann realizes that the computer she used to order the donuts now has a virus that can be traced back to the Donut Forget Me website. None of Ann’s work can be recovered, her computer is useless, and she loses her job. Ann sue Donut Forget Me for lost wages and damages.

This scenario can easily be avoided with the inclusion of a clear Terms of Use. Terms of Use generally state that the business cannot be held liable for direct, special, or indirect damages, such as Ann’s loss of salary or the infection of her computer. A Terms of Use would prevent Ann’s case from going forward, whereas, without a Terms of Use, Donut Forget Me may be held liable for Ann’s damages.

2. Choice of Law

Another important aspect of Terms of Use is that they can determine which laws will apply in case a dispute arises. For any business owner, deciding which jurisdiction a dispute must be brought in is a huge advantage and could save the business owner thousands of dollars.

Let’s take a look at our previous example again. Donut Forget Me is a business incorporated in Massachusetts, with a brick-and-mortar bakery in Boston. Our litigious customer Ann lives in North Carolina but has an intense craving for donuts from Donut Forget Me. She fills out an order online, and as the donuts are perishable, Donut Forget Me ships them overnight through FedEx. However, the smell of the donuts is so irresistible that the FedEx driver eats half the donuts before they arrive. Ann files a lawsuit against Donut Forget Me in North Carolina.

In this case, Donut Forget Me would be expected to travel to North Carolina on a regular basis for depositions, hearings, and ultimately, a trial. This would incur costs for airline tickets as well as accommodations and meals. If Donut Forget Me is a one-man shop, the owner would also face additional labor costs in hiring and training someone to run the business while he is in North Carolina. However, if Donut Forget Me had included a choice of law clause in its Terms of Use that limited any dispute to be brought in Massachusetts under Massachusetts law, litigation would proceed in Massachusetts and ultimately be less costly for the company. In addition to these cost savings, a business owner may choose a particular jurisdiction due to its favorable attitude or laws towards that business. For example, if Massachusetts had a history of ruling leniently on donut shop owners, but North Carolina did not, it would be wise for Donut Forget Me to include Massachusetts as its choice of jurisdiction in its Terms of Use.

3. Control

Lastly, Terms of Use also set out particular rules, allowing a business owner more complete control over his website. Terms of Use can articulate what type of conduct is not permitted on the site, such as leaving inappropriate comments or advice on how to commit a crime, scraping the website for commercial purposes, or reproducing content published by the business owner. Without such rules in place, a user cannot be held liable for inappropriate conduct.

For example, let’s say that Donut Forget Me allows users to leave reviews of each donut it sells. Donut Forget Me receives approximately 20 reviews per week, and the majority are very positive. One day, Donut Forget Me realizes that it has received 40 new reviews in 24 hours; when the owner of Donut Forget Me investigates this issue, he discovers that a user named Mr. Clown has been posting obscene, pornographic, and inappropriate comments on his website. Mr. Clown has even gone so far as to provide advice on how to kidnap children with Donut Forget Me mini-donuts. Donut Forget Me’s owner immediately deletes the comments, but they keep appearing. He is at a loss as to what to do.

Clearly, the comments by Mr. Clown are undesirable, and possibly open Donut Forget Me up to criminal liability. In this case, Donut Forget Me would have been wise to include Terms of Use that stated that users cannot leave comments that are pornographic, obscene, or criminal in nature and that Donut Forget Me cannot be held liable for any comments left by users. This would allow Donut Forget Me to block Mr. Clown from making further comments and would ensure that other users are presented with a professional website.

Including Terms of Use on a website or app has significant legal advantages that business owners should take note of. A well-written Terms of Use lays out the ground rules for users, crucially limits a business’s liability, and allows a business owner to determine which law will govern any disputes that arise. As shown above, even a small, one-man donut shop can benefit from having Terms of Use clearly stated on its website.

It is important to note, however, that Terms of Use can be written very differently depending on the business involved. Boilerplate Terms of Use that are available over the Internet may not cover your particular business needs. Although the main points outlined here are applicable to most businesses, it is often prudent to consult a lawyer to draft Terms of Use that are a particular fit for your website or app.