Why Cut off Buyers’ Claims by a Limitation Period?

Abstract

In a sales contract the buyer’s claim is cut off after the expiration of the limitation period unless the parties have specified a longer duration in their contract. This means that by default the buyer is prevented from seeking remedies although the good’s dysfunction was due to a defect present at the time of purchase. Since the existence of limitation periods lowers the incentive for the seller to deliver goods that perform according to the reasonable expectations of the buyer, limitation periods have been the subject of controversy. This article argues that establishing a limitation period as a legal default can be rationalized by the ratio of transaction costs to deterrent effect falling over time. The ratio falls for two reasons. First, a good that has endured for some period of time is, in general, likely to be closer to adequate quality than a good which breaks down shortly after purchase, and so the importance of the deterrent effect of allowing an early claim is larger than that of allowing a later claim, even when both claims are valid. Second, a larger fraction of claims that arise later is likely to be unwarranted, since the number of breakdowns that cannot be considered defects increase over time, and buyers are likely to mistake some of these breakdowns for defects. It will be argued that if claims are allowed indefinitely, the transaction costs of handling claims will at some point more than outweigh the positive incentive effect. Some empirical evidence is provided in support of the rationale.