What is the difference between a contract of work and a sales contract?

In commercial activities, when parties sign a contract for the supply of certain goods, they usually ignore the nature of the contact, which says a contract of work or a sales contract. However, when a dispute arises, the party who sues the counterparty shall determine the cause of the litigation, such choice of the nature of relevant contract may lead to a significant difference in the judgment. The reason is that the rights and obligations of the parties, the burden of proof, and the jurisdiction provisions (the jurisdiction for a contract of work is mainly the place of processing, and for a sales contract is mainly the place of delivery) are different for the two types of contracts.

Therefore, it is necessary for parties to understand the difference between the two types of contracts, by which they could design provisions in a beneficial manner.

The following is a summary of the differences between the two types of contracts based on the analysis of the judgements released by the Supreme People’s Court, and its judicial views in practice.

1. The purpose of signing the contract and the main obligations are different. The “Guidelines for the Application of Main Points and the Right to Claim of Civil Cases of the Supreme People’s Court (2020)” mentioned that, “the key difference between the two types of contracts is that the purpose of a contract of work is to complete certain work, the object for the main rights and obligations of the parties is certain work; and the purpose of a sales contract is to transfer the ownership of a subject matter, the object for the main rights and obligations of the parties is a subject matter.” In other words, in a contract of work, to transfer the ownership of the subject matter, is the collateral obligation of the completion of the certain work, which is not the main obligation of the contractor. Take two cases for reference. In the judgment of (2018) Zui Gao Fa Min Shen No.3805, the judge points out that, “although the ‘Commercial Contract’ and its ‘Technical Annex’ have prescribed that Company A has the obligation to provide data, training, equipment debugging, as well as the design of non-production plants, production rooms, and civil engineering design of all equipment foundations of the production line, Company A’s main obligation is to deliver the production line agreed in the scope of supply in the ‘Technical Annex’, so the nature of the contract is a sales contract.” In the judgment of (2021) Zui Gao Fa Min Shen No.5751, the judge mentions that, “the contract involved in the case stipulated that ‘the risk and ownership of the subject matter shall be transferred to Party A from the time of delivery, that is, the risk of the subject matter before delivery at the agreed time and place shall be borne by Party B, and the risk of the subject matter after delivery shall be borne by Party A’, so the rights and obligations of both parties refer to the subject matter rather than a certain work.”
2. Whether the subject matter is specific. The subject matter of a sales contract normally is in common use, which generally has national or industrial standards. However, the subject matter of a contract of work is specially made according to the special requirements of the ordering party and shall meet the special needs of the ordering party. It often has a special purpose and specificity, can only be used by the ordering party, and normally could not be circulated in the market. Even if it can be sold in the market, it would be devalued. For example, in the (2019) Zui Gao Fa Min Zai No. 383 case, Company B’s technology regarding the design and production of certain equipment is very mature, and the equipment sold to Company A and other companies are quite similar, so it is not customized.
3. The ordering party has certain control over the production process. The contractor has the obligation to accept the supervision and inspection of the ordering party. Normally, there is no such requirement in a sales contract, because the buyer only inspects whether the delivered subject matter meets the quality requirements, and does not have the right to supervise and inspect the production process. For example, in the (2019) Zui Gao Fa Min Zai No.383 case, the judge points out that, “although Company A claimed that the contract involved in the case is a contract of work, it also admitted that it did not have any instructions to Company B, and Company B was responsible for the technical support, in addition, Company A did not have the supervision obligation, so Company A’s claim should be rejected.” Coincidentally, the (2021) Zui Gao Fa Min Shen No.5751 judgement and (2019) Zui Gao Fa Min Shen No.4300 judgement emphasize the same opinion, and both judges hold that the ordering party shall have the right to supervise and inspect the work of the contractor, and unilaterally require the contractor to stop the work, which means the ordering party could control the whole process of the contractor’s work.
4.  The nature of the paymentis different. The payment agreed in a sales contract is the value of the subject matter itself, while the payment agreed in a contract of work is the labor remuneration. As mentioned in the judgment of the (2016) Zui Gao Fa Min Shen No. 3342 case, because the name of the contract is the “Sand and Stone Processing Contract”, the main obligation of Men Yuan Quarry is to process sand and stone, and the unit price is named as the processing labor fees, it is not improper to determine the cause of the case as a contract of work.
5. The contract of work has a strong connection with personnel. In a contract of work, the ordering party is often concerned about the qualifications, technical ability and equipment conditions of the contractor. However, in a sales contract, the buyer is mainly concerned about the ownership of the subject matter, rather than the manufacturer, production conditions and process of the subject matter.
6. The contractor has the right of lien and the right of defense for simultaneous performance. In a contract of work, if the ordering party fails to pay the remuneration or material fees, the contractor may have a lien on the completed work product or the right to refuse to deliver it. To be noted that such rights could be excluded by agreement. However, unless there is an agreement in the sales contract, such as payment before delivery, the seller does not have a lien on the subject matter, and the right of defense for simultaneous performance.
7. Finally, the contractor shall assume the confidentiality obligation for the contracted work, but normally such confidentiality obligation would not be prescribed in a sales contract.