Factor Must Protect Goods.—So long as any part of the principal’s goods are unsold and in the possession of the factor, he must protect and safeguard them. He is not liable, however, for damage from forces or conditions over which he has no control. The degree of diligence required of him largely depends on the nature of the goods. What would be considered due diligence in one case, might be construed as gross neglect in the case of more valuable or perishable goods.
Consignments to be Kept Separate.—It is a fundamental requirement and of the very essence of the factor relationship, that the principal’s goods must be kept distinct from all other goods in the factor’s possession. This applies not only to the consigned goods as such, but also to the assets received by the factor upon the sale of such goods—as cash, accounts and notes receivable, etc. To satisfy this latter requirement it is usually held that actual separation is not necessary, but that it is sufficient to record these properties in such a manner that they can always be separated if the need arises. The principal’s properties are held in trust for him by the factor but are subject to the legitimate claims of the factor.
Expenses Charged against Consignment.—Barring specific instructions to the contrary, the factor may incur certain expenses necessary to safeguard the interest of his principal and to effect the sale of his goods. These include such items as freight, insurance, duty, handling charges, allowances and rebates to customers for unsatisfactory goods, etc. All these are proper charges against the consignment, i.e., against the principal.
Factor’s Lien on Consigned Goods.—For any legitimate expenses incurred and for any payments made the principal in advance of the settlement date, the factor has a lien on the consigned goods. It has been held in some cases that the factor has the right to sell the goods in satisfaction of the lien, and if the proceeds of the sale are not sufficient to satisfy the factor’s claims against the principal, the latter is liable for the amount of the deficiency. The factor’s commission from the principal is also protected by this lien and, if necessary, the factor may apply part or all the proceeds of the sale toward the payment of his commission. A lien, of course, is binding only so long as the goods are in the factor’s possession.
Account Sales.—Upon completion of his service the factor must make a strict accounting of his transactions to the principal. In case of dispute he can be required to open to the inspection of the principal his records covering the consignment dealings. The usual method of settlement is by means of an “account sales” rendered by the factor to his principal. The account sales is a summarized statement of all transactions connected with a particular consignment. It constitutes the formal accounting for the consignment transaction. It must show the amount or quantity of goods received, the sales made, and the expenses incurred, the balance being the amount due the principal. This amount may be either remitted or credited to the principal’s account, according to the contract between them. The usual form of account sales is shown in [Form 44].
Goods may be billed to the factor at cost, at the current market price, or at some fictitious figure. This billing price does not enter into the accounting of the factor at all. It is the selling price of the factor which is the basis of income against which expenses are charged. The principal may indicate a selling price for his goods but this serves merely as a guide to the factor as to the price desired. If, however, the principal gives specific instruction as to sale price, the agent must govern himself accordingly.
Form 44. Account Sales
Compensation of Factor.—The factor usually receives his compensation on a commission basis—so many per cent of the sales he makes. When the contract makes specific provision for it, he may sell the goods at a higher price than that fixed by the principal and retain part or all of the excess as compensation.
“Del Credere” Agency.—Where a factor sells on credit, the accounts belong to the principal and any loss through uncollectible accounts is borne by the latter. Sometimes the factor guarantees the collection of all accounts; in this case he is known as a “del credere” agent and receives additional compensation for assuming this risk. Such a guarantee really amounts to a sale of the accounts to the factor.