FACTORS
People who are employed by others to sell or purchase goods, who are entrusted with possession of the goods, and who are compensated by either a commission or a fixed salary.
A factor is a type of agent who sells goods
owned by another, called a principal. The factor
engages more frequently in the sale of merchan-
dise than the purchase of goods. A factor is
distinguished from a mere agent in that a
factor must have possession of the principal’s
property, while an agent need not. The factor-
principal relationship is created by a contract.
Both parties are expected to comply with the
terms of the agreement. The contract is ter-
minable by the factor, by the principal, or by
operation of law.
The merchandise entrusted to the factor is
called a consignment, and a factor is often syn-
onymously called a consignee. The factor is
sometimes referred to as a commission mer-
chant when his or her compensation is based on
a percentage of the sale price. Factorage is
defined as the compensation paid to factors.
A home factor is the name given to a factor
who resides in the same state or country as the
principal; a foreign factor is one who lives in a
state or country other than that of the principal.
Factor-Principal Relationship
Absent any special authority, a factor can
bind the principal only in the ordinary course of
business. The factor cannot delegate his or her
duty to another individual without the knowl-
edge and consent of the principal, unless custom
and usage allow otherwise. He or she has the
implied power to do everything reasonably nec-
essary to sell the goods entrusted to him or her,
and may even make the sale in his or her own
name without disclosing the name of the princi-
pal. The factor has the power to receive payment
and to give a receipt to the purchaser. There is no
authority given to the factor to use the goods for
personal benefit, to make an exchange for other
merchandise, to cancel a completed sale, or to
extend the time of payment after a sale.
A factor must exercise reasonable care, skill,
and diligence in selling the goods and is respon-
sible for losses resulting from failure to meet this
standard. He has a duty to act with GOOD FAITH
and loyalty for the protection and advancement
of the interests of the principal and may not
make a secret profit for himself. Unless the prin-
cipal agrees, the factor may not purchase the
merchandise.
The factor must faithfully execute the princi-
pal’s instructions and is liable for any loss result-
ing from failure to do so. No liability will be
imposed if the instructions are vague, ambigu-
ous, impossible to perform, or illegal, or if the
factor is obstructed from following them due to
no fault of his or her own. The factor has a duty
to inform the principal of any events that neces-
sitate taking protective measures to ensure the
safety of the goods; this stems from the obliga-
tion to care for the goods. A factor who cares for
the merchandise in a reasonable manner is not
responsible for business losses not due to his
fault. He must not mingle the principal’s goods
with his own or with those of other people. The
factor has the authority to insure the goods and
may do so in his name. He must obtain insur-
ance when instructed to do so by the principal,
by the purchaser, or when custom imposes that
obligation and must exercise reasonable pru-
dence and diligence in securing adequate insur-
ance coverage.
In the absence of specific instructions, a fac-
tor may sell in such a manner and on such terms
as he considers appropriate, generally within a
reasonable time and at his business establish-
ment.When the time and location of the sale are
specified in the agreement, the factor must exer-
cise reasonable diligence to sell within the allot-
ted time or at the authorized place. If the
principal fails to designate a desired price, the
factor then has an obligation to sell with reason-
able skill and diligence so as to obtain the high-
est price possible in the current market. When
instructed to sell at a specified price, he must do
so, barring some unforeseeable event.
Goods are generally sold for cash upon deliv-
ery. When instructed to sell on credit, a factor
must exercise reasonable care and secure collat-
eral to ensure payments. He is not liable for any
loss with regard to payment that occurs through
no fault of his own, unless he specifically is made
liable in the contract with the principal. Author-
ity to arrange credit terms customary in the mar-
ket in which the goods are sold is implied. The
factor must ascertain the financial stability of a
purchaser on credit and must diligently advise
the principal of any adverse change in the credi-
tor’s financial standing. He has no duty to
divulge the name of a purchaser who buys on
credit unless the information is needed for the
principal to act on the sale.
Reasonable care and diligence must be taken
in collecting the price of merchandise sold on
credit. A factor must account to the principal for
the proceeds and apply them in the instructed
manner. He or she must not commingle the pro-
ceeds with his or her own money or with the
funds of another, unless there is an existing cus-
tom of commingling to which the principal con-
sents. The proceeds are held subject to the
principal’s direction and, unless required by
agreement or prior course of dealing, it is not nec-
essary for the factor to immediately tender them.
A factor is liable to the principal when he
deals with the goods in a manner that is incon-
sistent with the right of the principal. A viola-
tion of instructions, breach of duty,misconduct,
and FRAUD are grounds upon which the princi-
pal may recover for damages incurred. Interest is
recoverable if the factor delays in remitting pay-
ment for goods after a sale.
There is a duty to keep regular and accurate
accounts of all transactions, and the principal
has a right to inspect the accounts. A factor has
no authority to settle a claim against the princi-
pal, to submit a claim to ARBITRATION,or to
reship goods to another market in order to sell
them. He may, however, give a WARRANTY with
respect to the quality of the goods.
States regulate the activities of a factor by
requiring licenses and imposing taxes. To ensure
the diligent performance of duties, some states
have a factor post a bond before being allowed to
conduct his business. The primary purpose of the
regulation is to protect persons who deal with fac-
tors against dishonest or unscrupulous persons.
Compensation for Services
Compensation is a contractual right, and,
subject to the terms and conditions of the agree-
ment, commissions are paid when a sale is
made. When an express agreement or statute
does not fix the amount of compensation, the
factor is entitled to the just and reasonable
remuneration customarily charged for these
services. In the absence of a customary rate, the
factor has a right to receive a fee that is fair and
reasonable. Acts of fraud, misconduct, gross
negligence, and breach of contract would cause
the factor to forfeit the right to compensation.
The advancement of money due for the cost
of freight depends on the contract or course of
dealing between the factor and principal.When
a factor advances funds in connection with the
goods in his care and is not reimbursed by the
principal, the factor has a right to sell the goods
in order to satisfy the expenditures. Any excess
must be returned to the principal. The factor is
entitled to interest on any advances but forfeits
the right to reimbursement and interest if his
NEGLIGENCE, fraud, or misconduct results in a
loss for the principal.
Enforcement
A factor has a general lien for all commis-
sions due him and for all expenditures, includ-
ing advances plus interest, properly incurred. A
factor’s lien secures the compensation, expenses,
advances, and liabilities incurred by him for the
principal. A factor is not entitled to a lien unless
he has fulfilled all contractual and statutory
requirements. He must have actual or construc-
tive possession of the goods before the lien
attaches; and if the factor has constructive pos-
session of the goods, he must have control over
the property before a lien attaches. Once
attached, a lien is waived only by express terms
or by clear implication, such as when the factor
acts in a manner that is inconsistent with its
CONTINUANCE. Fraud or misconduct in trans-
acting the principal’s business are other grounds
for waiving a lien. A factor may enforce his lien
by retaining the entrusted property until his
claims are liquidated, or he may sell the goods in
order to satisfy his claims, returning any excess
