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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 merchandise 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 terminable 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 synonymously called a consignee. The factor is sometimes referred to as a commission merchant 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 knowledge and consent of the principal, unless custom and usage allow otherwise. He or she has the implied power to do everything reasonably necessary 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 principal. 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 responsible 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 principal agrees, the factor may not purchase the merchandise.

The factor must faithfully execute the principal's instructions and is liable for any loss resulting from failure to do so. No liability will be imposed if the instructions are vague, ambiguous, 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 necessitate taking protective measures to ensure the safety of the goods; this stems from the obligation 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 insurance when instructed to do so by the principal, by the purchaser, or when custom imposes that obligation and must exercise reasonable prudence and diligence in securing adequate insurance coverage.

In the absence of specific instructions, a factor may sell in such a manner and on such terms as he considers appropriate, generally within a reasonable time and at his business establishment. When the time and location of the sale are specified in the agreement, the factor must exercise reasonable diligence to sell within the allotted time or at the authorized place. If the principal fails to designate a desired price, the factor then has an obligation to sell with reasonable skill and diligence so as to obtain the highest 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 delivery. When instructed to sell on credit, a factor must exercise reasonable care and secure collateral 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. Authority to arrange credit terms customary in the market 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 creditor'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 proceeds with his or her own money or with the funds of another, unless there is an existing custom of commingling to which the principal consents. The proceeds are held subject to the principal's direction and, unless required by agreement or prior course of dealing, it is not necessary 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 inconsistent with the right of the principal. A violation of instructions, breach of duty, misconduct, and Fraud are grounds upon which the principal may recover for damages incurred. Interest is recoverable if the factor delays in remitting payment 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 principal, 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 factors against dishonest or unscrupulous persons.

Compensation for Services

Compensation is a contractual right, and, subject to the terms and conditions of the agreement, 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.


A factor has a general lien for all commissions due him and for all expenditures, including 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 constructive possession of the goods before the lien attaches; and if the factor has constructive possession 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 transacting 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 to the principal.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
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