1911 Encyclopædia Britannica/Factor

by Leslie Frederic Scott

FACTOR (from Lat. facere, to make or do), strictly “one who makes”; thus in ordinary parlance, anything which goes to the composition of anything else is termed one of its “factors,” and in mathematics the term is used of those quantities which, when multiplied together, produce a given product. In a special sense, however—and that to which this article is devoted—“factor” is the name given to a mercantile agent (of the class known as “general agents”) employed to buy or sell goods for a commission. When employed to sell, the possession of the goods is entrusted to him by his principal, and when employed to buy it is his duty to obtain possession of the goods and to consign them to his principal. In this he differs from a broker (q.v.), who has not such possession, and it is this distinguishing characteristic which gave rise in England to the series of statutes known as the Factors Acts. By these acts, consolidated and extended by the act of 1889, third parties buying or taking pledges from factors are protected as if the factor were in reality owner; but these enactments have in no way affected the contractual relations between the factor and his employer, and it will be convenient to define them before discussing the position of third parties as affected by the act.

I. Factor and Principal

A factor is appointed or dismissed in the same way as any other agent. He may be employed for a single transaction or to transact all his principal’s business of a certain class during a limited period or till such time as his authority may be determined. A factor’s duty is to sell or buy as directed; to carry out with care, skill and good faith any instructions he may receive; to receive or make payment; to keep accounts, and to hand over to his principal the balance standing to his principal’s credit, without any deduction save for commission and expenses. All express instructions he must carry out to the full, provided they do not involve fraud or illegality. On any point not covered by his express instructions he must follow the usual practice of his particular business, if not inconsistent with his instructions or his position as factor. Many usages of businesses in which factors are employed have been proved in court, and may now be regarded as legally established. For instance, he may, unless otherwise directed, sell in his own name, give warranties as to goods sold by him, sell by sample (in most businesses), give such credit as is usual in his business, receive payment in cash or as customary; and give receipts in full discharge, sell by indorsement of bills of lading; and insure the goods. It is his duty to clear the goods at the customs, take charge of them and keep them safely, give such notices to his principal and others as may be required, and if necessary take legal proceedings for the protection of the goods. On the other hand, he has not authority to delegate his employment, or to barter; and as between himself and his principal he has no right to pledge the goods, although as between the principal and the pledgee, an unauthorized pledge made by the factor may by virtue of the Factors Act 1889 be binding upon the principal. It is, moreover, inconsistent with his employment as agent that he should buy or sell on his own account from or to his principal. A factor has no right to follow any usage which is inconsistent with the ordinary duties and authority of a factor unless his principal has expressly or impliedly given his consent.

On the due performance of his duties the factor is entitled to his commission, which is usually a percentage on the value of the goods sold or bought by him on account of his principal, regulated in amount by, the usages of each business. Sometimes the factor makes himself personally responsible for the solvency of the persons with whom he deals, in order that his principal may avoid the risk entailed by the usual trade credit. In such a case the factor is said to be employed on del credere terms, and is entitled to a higher rate of commission, usually 21/2% extra. Such an arrangement is not a contract of guarantee within the Statute of Frauds, and therefore need not be in writing. Besides his remuneration, the factor is entitled to be reimbursed by his principal for any expenses, and to be indemnified against any liabilities which he may have properly incurred in the execution of his principal’s instructions. For the purpose of enforcing his rights a factor has, without legal proceedings, two remedies. Firstly, by virtue of his general lien (q.v.) he may hold any of his principal’s goods which come to his hands as security for the payment to him of any commission, out-of-pocket expenses, or even general balance of account in his favour. Although he cannot sell the goods, he may refuse to give them up until he is paid. Secondly, where he has consigned goods to his principal but not been paid, he may “stop in transit” subject to the same rules of law as an ordinary vendor; that is to say, he must exercise his right before the transit ends; and his right may be defeated by his principal transferring the document of title to the goods to some third person, who takes it in good faith and for valuable consideration (Factors Act 1889, section 10). If the factor does not carry out his principal’s instructions, or carries them out so negligently or unskilfully that his principal gets no benefit thereby, the factor loses his commission and his right to reimbursement and indemnity. If by such failure or negligence the principal suffers any loss, the latter may recover it as damages. So too if the factor fails to render proper accounts his principal may by proper legal proceedings obtain an account and payment of what is found due; and threatened breaches of duty may be summarily stopped by an injunction. Criminal acts by the factor in relation to his principal’s goods are dealt with by section 78 of the Larceny Act 1860.

II. Principal and Third Party

(a) At Common Law.—The actual authority of a factor is defined by the same limits as his duty, the nature of which has been just described; i.e. firstly, by his principal’s express instructions; secondly, by the rules of law and usages of trade, in view of which those instructions were expressed. But his power to bind his principal as regards third parties is often wider than his actual authority; for it would not be reasonable that third parties should be prejudiced by secret instructions, given in derogation of the authority ordinarily conferred by the custom of trade; and, as regards them, the factor is said to have “apparent” or “ostensible” authority, or to be held out as having authority to do what is customary, even though he may in fact have been expressly forbidden so to do by his principal. But this rule is subject to the proviso that if the third party have notice of the factor’s actual instructions, the “apparent” authority will not be greater than the actual. “The general principle of law,” said Lord Blackburn in the case of Cole v. North-Western Bank, 1875, L.R. 10, C.P. 363, “is that when the true owner has clothed any one with apparent authority to act as his agent, he is bound to those who deal with the agent on the assumption that he really is an agent with that authority, to the same extent as if the apparent authority were real.” Under such circumstances the principal is for reasons of common fairness precluded, or, in legal phraseology, estopped, from denying his agent’s authority. On the same principle of estoppel, but not by reason of any trade usages, a course of dealing which has been followed between a factor and a third party with the assent of the principal will give the factor apparent authority to continue dealing on the same terms even after the principal’s assent has been withdrawn; provided that the third party has no notice of the withdrawal.

Such apparent authority binds the principal both as to acts done in excess of the actual authority and also when the actual authority has entirely ceased. For instance, A. B. receives goods from C.D. with instructions not to sell below 1s. per ℔; A. B. sells at 101/2d., the market price; the buyer is entitled to the goods at 101/2d., because A. B. had apparent authority, although he exceeded his actual authority. On the same principle the buyer would get a good title by buying from A. B. goods entrusted to him by C. D., even though at the time of the sale C. D. had revoked A. B.’s authority and instructed him not to sell at all. In either case the factor is held out as having authority to sell, and the principal cannot afterwards turn round and say that his factor had no such authority. As in the course of his business the factor must necessarily make representations preliminary to the contracts into which he enters, so the principal will be bound by any such representations as may be within the factor’s actual or apparent authority to the same degree as by the factor’s contracts.

(b) Under the Factors Act 1889.—The main object of the Factors Acts, in so far as they relate to transactions carried out by factors, has been to add to the number of cases in which third parties honestly buying or lending money on the security of goods may get a good title from persons in whose possession the goods are with the consent, actual or apparent, of the real owners, thus calling in aid the principle of French law that “possession vaut titre” as against the doctrine of the English common law that “nemo dat quod non habet.” The chief change in the law relating specially to factors has been to put pledges by factors on the same footing as sales, so as to bind a principal to third parties by his factor’s pledge as by his factor’s sale. The Factors Act 1889 in part re-enacts and in part extends the provisions of the earlier acts of 1823, 1825, 1842 and 1877; and is, so far as it relates to sales by factors, in large measure merely declaratory of the law as it previously existed. Its most important provisions concerning factors are as follows:—

Section I., s.s. 1. The expression mercantile agent shall mean a mercantile agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods;

2. A person shall be deemed to be in possession of goods or of the documents or title to goods when the goods or documents are in his actual custody or are held by any other person subject to his control or for him on his behalf.

4. The expression “document of title” shall include any bill of lading, dock warrant, warehouse keeper’s certificate, and warrant or order for the delivery of goods, and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by indorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.

Section II., s.s. 1. Where a mercantile agent is, with the consent of the owner, in possession of goods or of the documents or title to goods, any sale, pledge or other disposition of the goods made by him when acting in the ordinary course of business of a mercantile agent shall, subject to the provisions of this act, be as valid as if he were expressly authorized by the owner of the goods to make the same; provided that the person taking under the disposition acts in good faith, and has not at the time of the disposition notice that the person making the disposition has not authority to make the same.

2. Where a mercantile agent has, with the consent of the owner, been in possession of goods or of the documents of title to goods, any sale, pledge or other disposition which would have been valid if the consent had continued shall be valid notwithstanding the determination of the consent; provided that the person taking under the disposition has not at the time thereof notice that the consent has been determined.

3. Where a mercantile agent has obtained possession of any documents of title to goods by reason of his being or having been, with the consent of the owner, in possession of the goods represented thereby, or of any other documents of title to the goods, his possession of the first-mentioned documents shall, for the purposes of the act, be deemed to be with the consent of the owner.

III. Enforcement of Contracts

1. Where a factor makes a contract in the name of his principal and himself signs as agent only, he drops out as soon as the contract is made, and the principal and third party alone can sue or be sued upon it. As factors usually contract in their own name this is not a common case. It is characteristic of brokers rather than of factors.

2. Where a factor makes a contract for the principal without disclosing his principal’s name, the third party may, on discovering the principal, elect whether he will treat the factor or his principal as the party to the contract; provided that if the factor contract expressly as factor, so as to exclude the idea that he is personally responsible, he will not be liable. The principal may sue upon the contract, so also may the factor, unless the principal first intervene.

3. Where a factor makes a contract in his own name without disclosing the existence of his principal, the third party may, on discovering the existence of the principal, elect whether he will sue the factor or the principal. Either principal or factor may sue the third party upon the contract. But if the factor has been permitted by the principal to hold himself out as the principal, and the person dealing with the factor has believed that the factor was the principal and has acted on that belief before ascertaining his mistake, then in an action by the principal the third party may set up any defences he would have had against the factor if the factor had brought the action on his own account as principal.

4. Where a factor has a lien upon the goods and their proceeds for advances made to the principal it will be no defence to an action by him for the third party to plead that he has paid the principal, unless the factor by his conduct led the third party to believe that he agreed to a settlement being made with his principal.

5. The factor who acts for a foreign principal will always be personally liable unless it is clear that the third party has agreed to look only to the principal.

6. If a factor contract by deed under seal he alone can sue or be sued upon the contract; but mercantile practice makes contracts by deed uncommon.

Authorities.—Story, Commentaries on the Law of Agency (Boston, 1882); Boyd and Pearson, The Factors Acts 1823 to 1877 (London, 1884); Blackwell, The Law relating to Factors (London, 1897).  (L. F. S.)