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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.

Additional topics

Law Library - American Law and Legal InformationFree Legal Encyclopedia: Ex proprio motu (ex mero motu) to FileFactors - Factor-principal Relationship, Compensation For Services, Enforcement