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Appellate Court Affirms that Oral Agreement for Home Improvement Project May Be Enforced Against "Sophisticated Homeowner" Notwithstanding Business & Professions Code Requirement that All Home Improvement Contracts Be in Writing

Business and Professions Code section 7159 governs contracts for home improvement projects (which exceed $500), and provides heightened requirements for same, including a requirement that all contracts for these projects be in writing.

Homeowners with only oral contracts on home improvement projects have used this provision to seek to invalidate payment claims by their contractors on the basis that the oral agreement which was the basis of the payment sought is not enforceable.

While courts have acknowledged the requirements of Section 7159, they have been reluctant to automatically invalidate an otherwise valid payment claim on this perceived "technicality". In doing so the court has made a distinction between home improvement projects on which there is a clear imbalance of sophistication and resources between the contractor and owner, and other projects where a certain level of parity exists and the owner is deemed sophisticated. Courts have recognized that Section 7159 was designed primarily to protect the former.

This distinction was first made in Asdourian v. Araj, 38 Cal.3d 276 (1985). In Asdourian, the homeowner was a grocer by trade, but bought and sold real estate for investment purposes. He had also been involved in several construction projects leading up to the project in question.

He and contractor Araj had an oral home improvement contract relative to the subject project and Araj sued for payment and won at trial. Asdourian appealed, arguing, among other things, that the oral contract was unenforceable pursuant to Section 7159. Araj argued that he should not be barred from enforcing the contract because Section 7159 is "intended to protect unsophisticated home owners and tenants from overreaching by unscrupulous contractors, not to protect persons such as [Asdourian], who own several properties for investment purposes."

The appeals court agreed, and also noted that Asdourian would be unjustly enriched if the oral agreement was not enforced, and held that, "[t]he penalty which would result from the denial of relief would be disproportionately harsh in relation to the gravity of the violations."

This holding was recently affirmed and expanded in the matter of Hinerfeld-Ward, Inc. v. Lipian, et al., 188 Cal.App.4th 86 (2010). In Lipian, the contractor in question was seeking to recover payment for home improvement work performed pursuant to an oral agreement, and the homeowner sought to invalidate the claim on the basis of Section 7159. The trial court sided with the contractor and the homeowner appealed.

Unlike the homeowner in Asdourian (who was a real estate investor and had been involved in several construction projects), the homeowners in Lipian were well educated and sophisticated people, but not familiar with construction. In the appeal they sought to use this factual distinction to argue that the Asdourian holding was inapplicable.

They acknowledged that they were well educated; the husband was a psychiatrist with an M.D. and a Ph.D. in psychology, and the wife had masters degrees in both education and clinical psychology. But they argued this background was not related to home improvement projects. Each had some experience with contracts. The wife negotiated rate increases with hospitals as part of her work with an insurance company and sometimes reviewed contracts. The husband had entered into employment contracts and office leases, one of which included remodeling work paid for by the landlord. They argued they lacked training or experience in home construction or home improvement projects since they had never before been involved in a home improvement project. Their only involvement in the real estate business was as homeowners.

The contractor argued that for Section 7159 to be inapplicable the homeowner did not necessarily need to be sophisticated relative to construction, but rather simply sophisticated in general.

The appeals court agreed, and also noted that the homeowners had significant involvement from an architect, who presumably was sophisticated in construction.

The take away from Lipian is that courts continue to be reluctant invalidate oral home improvement contracts and that the overall general level of sophistication of the homeowner - apart from specific knowledge of construction - will be a central factor in the analysis.

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