Understanding Terms of Use: Protect Your E-Commerce Business from Legal Risks

If you run a business with an online presence, you’ve likely come across a “Terms of Use” agreement. Also called Terms and Conditions (T&C) or Terms of Service (TOS), this legally binding document can be found on nearly every business website or app, typically nestled beside the privacy policy link. However, for many small businesses, particularly in e-commerce, the importance of Terms of Use is often underestimated or misunderstood.

In this article, we'll take a deep dive into what Terms of Use are, why you need them, and how they help protect your e-commerce business from legal and financial risks. We’ll use relatable examples, like a hypothetical custom donut shop, to illustrate the importance of including a well-crafted Terms of Use on your site. By the end, you’ll understand not only how to draft a Terms of Use, but also how to use it strategically to protect your business from lawsuits, customer disputes, and other potential liabilities.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more

What Are Terms of Use?

Terms of Use, sometimes referred to as Terms and Conditions or Terms of Service, are legally enforceable agreements between the business that owns a website or app and the users who visit or engage with it. These agreements establish the rules for using the site or app, including what users are allowed or not allowed to do. Think of them like the old rental agreements from video rental stores like Blockbuster – back in the day, you’d sign a membership form that specified rules such as not being able to rent to others, not copying the DVD, and agreeing to pay for damages if you lost or damaged the rented movie.

Today, similar rules are included in Terms of Use for websites and apps. They outline users' rights and obligations, stipulate restrictions, provide limitations of liability for the business, and specify important clauses like dispute resolution and governing law.

While it might be tempting to think of Terms of Use as unnecessary legal jargon—especially if you run a small business or e-commerce store—omitting them can expose you to serious risks and liabilities. Let’s look at how well-crafted Terms of Use can protect your business and prevent worst-case scenarios.

Limiting Liability and Protecting Against Legal Risks

Terms of Use are particularly important for limiting a business’s liability in a variety of situations. Without clearly stated limits on liability, your business is vulnerable to lawsuits from customers who may experience negative outcomes while using your website or app. Limiting your liability with a Terms of Use agreement can save your business from expensive litigation and even from going under due to costly damages.

Example: Custom Donut Shop Without Terms of Use

Let’s consider a hypothetical e-commerce store, “Donut Forget Me,” which sells custom donuts online. One day, a customer named Ann orders a dozen donuts from the website. After placing the order, she realizes her computer has been infected by a virus she traced back to the Donut Forget Me website. As a result, Ann loses valuable work files, rendering her computer unusable, and ultimately loses her job because of missed deadlines. In response, she decides to sue Donut Forget Me for lost wages, damages, and the costs of replacing her computer.

Without a Terms of Use agreement, Donut Forget Me could face serious legal consequences and be held liable for the damages Ann experienced—including compensation for lost wages. Even if Ann’s case is not ultimately successful, the legal fees and time needed to deal with a lawsuit could cripple a small business.

Solution: Limitation of Liability Clause

This scenario could have been avoided if Donut Forget Me had included a well-drafted Terms of Use on their website. By including a limitation of liability clause, the business can specify that it is not responsible for indirect, special, or consequential damages resulting from using the website—such as Ann’s loss of income or the computer virus infection.

• Actionable Example Clause: “[Company Name] shall not be liable for any indirect, special, consequential, or punitive damages arising out of or related to the use of the website, including but not limited to damages for lost profits, business interruption, loss of data, or other losses incurred by users.”

This type of provision effectively shields the business from liability if an unforeseen issue, such as a virus, affects a customer’s device.

E-Commerce Legal Agreements Guide

Choosing Your Legal Jurisdiction with Terms of Use

Another key aspect of Terms of Use is the ability to specify the governing law and venue for any disputes that arise between you and your customers. In simple terms, this clause determines which jurisdiction’s laws will be applied and where legal actions must be filed in case of a dispute. This can be especially crucial for e-commerce businesses, which often operate across state lines or even internationally.

Example: Cross-State Dispute Without Terms of Use

Let’s revisit Donut Forget Me. The business is based in Boston, Massachusetts, and a customer, Ann, lives in North Carolina. Ann orders a dozen donuts online, but when the package arrives, she finds half the donuts are missing. Frustrated, Ann decides to file a lawsuit against Donut Forget Me in North Carolina.

In this situation, Donut Forget Me may be required to travel to North Carolina for depositions, hearings, and potentially a trial. This means not only paying for airfare, accommodations, and meals but also bearing the costs of hiring someone to run the store while the owner is away. The costs could quickly add up, even if the case is without merit.

Solution: Governing Law and Venue Clause

By including a governing law and venue clause in the Terms of Use, Donut Forget Me can specify that all disputes must be litigated in Massachusetts, where the business is based, and under Massachusetts law.

• Actionable Example Clause: “These Terms and any disputes arising out of or relating to the use of the website shall be governed by the laws of the Commonwealth of Massachusetts, without regard to conflict of law principles. Any legal action or proceeding shall be brought exclusively in the state or federal courts located in Massachusetts.”

By including this clause, the business can avoid having to defend itself in another state and reduce its travel and legal expenses. Choosing a jurisdiction that is known to have more favorable laws for businesses, or a jurisdiction where your business is located, will make dispute resolution more predictable and manageable.

Control Over Website Usage and User Behavior

Terms of Use are also essential for setting ground rules for users of your website or app. They define what users can and cannot do while using your services, helping to maintain a positive user experience and prevent legal issues. This control extends to issues like unauthorized use of content, improper conduct in interactive areas like comment sections, or unlawful activities conducted on your platform.

Example: Dealing with Inappropriate User Content

Consider that Donut Forget Me allows users to leave reviews of the donuts sold on its website. Most reviews are positive, but one day, an individual under the name “Mr. Clown” begins posting obscene and offensive comments, including instructions on how to use mini-donuts for illegal activities. Naturally, this behavior is highly inappropriate, and the business needs to act quickly to prevent damage to its reputation and potential criminal liability.

Without a Terms of Use agreement, Donut Forget Me has little to no authority to prevent Mr. Clown from continuing to post inappropriate content, and the business may even face liability for allowing such content to be shared on its platform.

Solution: User Conduct and Content Moderation Clause

A properly drafted Terms of Use should include provisions that prohibit users from posting inappropriate or illegal content, and it should reserve the company’s right to remove such content and ban users who violate the rules.

• Actionable Example Clause: “Users are prohibited from posting content that is obscene, defamatory, abusive, or promotes illegal activities. [Company Name] reserves the right to remove any content deemed inappropriate at its sole discretion and to terminate user access to the website without prior notice.”

This type of clause allows Donut Forget Me to remove Mr. Clown’s posts immediately and block his access to the site, protecting the business from potential reputational and legal harm.

Additionally, the Communications Decency Act (CDA) provides immunity for website owners from liability for content posted by third parties, such as users. However, this immunity is not absolute, and the protection can be lost if the website owner takes an active role in creating or endorsing defamatory or harmful content. Therefore, including clear rules for user behavior in your Terms of Use and taking a neutral approach to user-generated content can help you retain immunity under the CDA.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more

Establishing User Responsibilities and Limiting Misuse

Your Terms of Use should make it clear that users are responsible for their actions on your website, including maintaining the confidentiality of their account information, avoiding misuse of the website, and respecting intellectual property rights. This helps you avoid liability in case a user misuses your website or causes harm to other users or third parties.

Example: Account Misuse and Unauthorized Access

Suppose a customer named Mike signs up for an account on Donut Forget Me’s website. He creates a password but later uses a simple, easily guessable one, like “password123.” Another individual guesses Mike’s password and gains access to his account, making unauthorized purchases. Mike later demands a refund and claims that the company is responsible for the unauthorized charges.

Without Terms of Use that clearly state the user’s responsibility for keeping their account secure, Donut Forget Me could be held liable for the unauthorized purchases.

Solution: User Account Security Clause

Including a clause in the Terms of Use that clearly defines user responsibilities for maintaining account security can limit the company’s liability in such cases.

• Actionable Example Clause: “Users are responsible for maintaining the confidentiality of their account information, including their username and password, and for any activities that occur under their account. [Company Name] is not liable for any unauthorized access resulting from a user’s failure to secure their account.”

By including this provision, Donut Forget Me can place the responsibility for account security on users, thereby significantly reducing the likelihood of liability for unauthorized activities. Additionally, providing users with clear guidelines on creating strong passwords and implementing two-factor authentication (2FA) can further strengthen account security and mitigate risks effectively.

Protecting Intellectual Property Rights

If your website includes original content—such as text, images, logos, or videos—then protecting your intellectual property rights is an important aspect of your Terms of Use. These rights help ensure that your content is not used without permission or misappropriated by competitors. Your Terms of Use should clearly state what constitutes your intellectual property, what usage rights users have, and the consequences of infringement.

Example: Unauthorized Use of Website Content

Imagine that Donut Forget Me has a unique logo that’s prominently displayed on the website. One day, the business owner discovers that a competitor has copied the logo and is using it on their own website to confuse customers into believing that their donuts are affiliated with Donut Forget Me. This can result in lost sales, brand dilution, and damage to the company’s reputation.

Solution: Intellectual Property Clause

A Terms of Use agreement should include an intellectual property clause that specifies which elements of the website are protected, prohibits unauthorized use, and outlines the actions the company may take in the event of infringement.

• Actionable Example Clause: “All content, including text, images, logos, graphics, and other materials available on the website, is the property of [Company Name] and is protected by copyright, trademark, and other intellectual property laws. Users are not permitted to copy, distribute, modify, or create derivative works from any content on the website without express written permission from [Company Name]. Unauthorized use may result in legal action.”

Including this clause makes it clear to users that your content is protected, and it deters unauthorized use or copying of your intellectual property.

Additionally, consider adding a Digital Millennium Copyright Act (DMCA) notice to your Terms of Use. The DMCA provides a mechanism for content owners to request the removal of infringing content. By adding a DMCA notice, you can facilitate the process of addressing unauthorized use of your content.

Disclaimer of Warranties and Limitation of Liability

It’s also important to include a disclaimer of warranties and limitation of liability in your Terms of Use to limit the risks associated with the use of your website. A disclaimer of warranties makes it clear that you cannot guarantee that your website will always be available or that it will be free from errors, while the limitation of liability clause limits the damages users can seek from you.

Example: Website Downtime

Let’s say that Donut Forget Me’s website goes down unexpectedly for several days due to a technical issue with the hosting provider. During this downtime, customers are unable to place orders, leading to lost sales and missed opportunities. One customer, frustrated by being unable to place an order, threatens to sue Donut Forget Me for the inconvenience.

Solution: Disclaimer of Warranties and Limitation of Liability Clause

By including these clauses in the Terms of Use, Donut Forget Me can reduce its exposure to liability for issues like website downtime or technical errors.

• Actionable Example Clause (Disclaimer of Warranties): “[Company Name] makes no representations or warranties of any kind, express or implied, as to the operation of the website, or the information, content, or materials included on the website. The website is provided on an ‘as is’ and ‘as available’ basis.”

• Actionable Example Clause (Limitation of Liability): “In no event shall [Company Name] be liable for any damages arising out of or related to the use of the website, including but not limited to direct, indirect, incidental, punitive, or consequential damages.”

These clauses can help protect the business from lawsuits resulting from temporary outages, technical issues, or other disruptions.

Privacy Policy Integration

Lastly, a well-crafted Terms of Use should be integrated with your privacy policy to help users understand how their data is collected, used, and protected. The privacy policy explains what information is collected, how it is used, and with whom it is shared, while the Terms of Use provides the legal framework for using the website. By linking your privacy policy in your Terms of Use, you provide a seamless experience for users and ensure transparency.

Example: Privacy Policy Reference

Suppose Donut Forget Me collects user data such as names, email addresses, and purchase history for marketing purposes. Including a link to the privacy policy in the Terms of Use helps customers understand how their data is handled.

• Actionable Example Clause: “Your use of the website is also governed by our Privacy Policy, which can be found [here]. By using the website, you agree to the terms of our Privacy Policy.”

Linking your privacy policy within the Terms of Use ensures that users are aware of both documents, providing additional clarity and compliance with data protection regulations.

Conclusion: Why Terms of Use Matter for Your E-commerce Business

Including well-drafted Terms of Use on your website is not just about legal compliance—it’s about safeguarding your business, managing customer expectations, and reducing risks. A properly constructed Terms of Use agreement can limit your liability, help you control disputes, protect your intellectual property, and ensure a positive user experience for your customers.

Do I need a business lawyer?

The biggest question now is, "Do I need a business lawyer?” For most businesses and in most cases, you don't need a lawyer to start your business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.

Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.

Legal GPS Pro

Protect your business with our complete legal subscription service, designed by top startup attorneys.

• ✅ Complete Legal Toolkit
• ✅ 100+ Editable Contracts
• ✅ Affordable Legal Guidance
• ✅ Custom Legal Status Report

Learn more