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Jeremy Gottschalk, founder of Marketplace Risk and expert in risk management, trust & safety, and legal strategy for marketplace startups.
If you’ve ever created an account or purchased something through a website, you’ve undoubtedly been presented with, and agreed to, the website’s terms of use agreement. Those terms of use, also referred to as “terms and conditions” or “terms of service,” are a legally binding contract that governs your relationship with that website. And, when it comes time to stand up your own marketplace website and/or mobile app, you probably know instinctively that you should add terms of use to which your customers must agree in order to create an account or transact. As a first line of defense, terms of use agreements can be leveraged to limit your liability, avoid class action lawsuits, compel arbitration, among a wide range of other benefits.
In short, terms of use agreements are one of the most effective tools to mitigate the risks and the exposures of any sort of claims or incidents tied to your marketplace. When you’re just getting started, however, it can be hard to know whether you’ve got all your bases covered. Often you won’t know how effective your terms of use are until something bad happens where you need to refer to your terms of use to defend your marketplace. And, if you gain traction and eventually hit scale, you will most certainly experience claims and incidents.
So, what are the most important provisions in effective terms of use agreements? We’ve outlined a few essentials to help you get started! Ensure that these are included in your terms of use, and your marketplace will be shored up against many of the potential legal hazards that come with everyday use of your service. Keep in mind that this list is not exhaustive; rather, it is supposed to give you an idea of a few of the most important provisions.
Limitation of Liability
One of the most crucial things you can include in your terms of use is a broad limitation of liability. The effect here is to minimize the exposure tied to your customers’ use of your marketplace, both on the supply side and the demand side.
You should think carefully about your limitations of liability and what you, as a marketplace, could potentially be liable for if something were to go wrong. In many cases, you will want to have a cap on your liability, but calculating this depends on a variety of factors, including whether your fees are paid via subscription or based on the amount that's transacted through the marketplace. You can also just pick a number out of thin air - there is really no magic to a cap on liability.
Most often, you’ll see caps that are equal to the amount transacted through your platform over a prior period of three, six or 12 months, for example, You may also calculate a multiple of the amount transacted through your platform over that time period to ensure that your customers may recover something, even if it is nominal. This is especially true in jurisdictions that do not permit businesses to completely limit their liability to zero.
Class Action Waivers
Let’s say for argument’s sake that there is some sort of a data breach of your marketplace, and some or all of your customer’s financial information or personal information is leaked. In this situation, naturally, it is likely that your customers will sue you.
In a case such as this, it is advisable to use your terms of use to prevent any kind of class action litigation, and for good reason. While the individual damages associated with the exposure of personal information in a breach might not be a lot, in the aggregate, class action plaintiff’s lawyers will sue you for millions, with many of those millions going to the lawyers and not to those damaged by the breach.
In fact, in many cases, class action suits are driven by plaintiff's lawyers who often stand to win huge amounts as a result of the settlements. These lawyers usually take the lion’s share of any settlements or damages, leaving the plaintiffs as the injured parties with a cents-on-the-dollar fraction of what their actual damages are. In this scenario a marketplace can find their legal costs quickly spiraling, while plaintiffs are often left feeling short-changed
For this reason, it’s important to remove the incentive for lawyers to capitalize on potentially low-damage incidents that affect a lot of your customers by including a class action waiver. This specifies that each customer who believes that they've been injured shall pursue their claim against you individually.
Arbitration
In many jurisdictions, in order to include a class action waiver, you need to do so in the context of arbitration. That means that you will want to consider including mandatory arbitration in the event of any claim related to your marketplace.
In addition to going hand-in-hand with class action waivers, arbitration is seen to resolve disputes faster, more efficiently and significantly more cost-effectively than traditional litigation. While this is not always the case, generally speaking, arbitration is the more preferable route. Beyond the efficiency and cost-savings, arbitration is confidential. So, the result of the arbitration, as well as the arbitration, itself, is never made public.
When compelling arbitration, there are many things to consider, including what law applies to the disputes, what procedural rules will apply to the arbitration, where the arbitration will be conducted, and whether the arbitration can be done virtually, as is the case with digital arbitration platforms like New Era ADR and FairClaims.
Severability Clauses
A severability clause is a relatively simple provision to include in your terms of use, but it could potentially save you from huge legal headaches.
Should any of the other provisions that are included in your terms of use agreements be held to be unenforceable, a legal case could be made that, by extension, all of the provisions in your terms agreement are unenforceable. A severability clause is a provision that states that, should one of your provisions be ruled unenforceable, the remainder of the provisions in your terms of use will still be enforceable. Needless to say, this could make the difference between a swift resolution and costly, drawn-out litigation (or arbitration).
Notification of Updates
Having a process for notification of updates in your terms of use is absolutely essential, because you want your customer to agree that if you change your terms of use, that they agree to be bound by the updated terms of use. While you get to choose the method of notification, it is recommended that you notify your customers by email, marking the terms of use with the current date and identifying them as updated or revised - however you do this, you need your customer to agree to the manner in which you choose to notify them - you cannot unilaterally change your terms of use without this.
At Marketplace Risk, we advise marketplaces to notify their customers by email if there's a material change to their terms of use. In addition, it should be prominently noted on the website and on the terms of use, themselves. That said, if the change is something that's immaterial - correcting typos for example - you could simply just update your Terms of Use as “Revised as of…”. Smaller, inconsequential changes like this don’t usually require proper notification, either.
One Final Thought...
By now, marketplace founders and operators understand the importance of enforceable terms of use agreements - both in form and in substance. But, if you ever have to defend yourself in arbitration or litigation, it will be incumbent upon you to prove that your customer agreed to your terms of use. While we won't go into the evidence that is required to prove that your customer manifested their assent to your terms of use, know that you will, indeed, have to prove that. Luckily, there are platforms like Ironclad Clickwrap (formerly PactSafe) that can streamline and accelerate enforceable terms of use agreements.
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