Since Aug. 30, 2012, public owners at the state, county and local levels, along with the myriad cast of bidders on governmental procurements, have had to deal with yet another public bidding requirement: the disclosure of investment activities in Iran certification required by P.L. 2012, c. 25. Over the past year, difficulties have been encountered in: (a) defining exactly what must be disclosed, by whom and when; (b) formulating a disclosure certification form that complies with the law and can be understood by reasonably intelligent bidders; and (c) adjudicating protests from disappointed bidders within the context of current public contract law jurisprudence.

Origin and Requirements of the State Act

With the enactment on July 1, 2010, of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), the federal government adopted a scheme to impose sanctions on companies that engage in a wide variety of business activities in Iran’s energy sector. P.L. 111-195. CISADA expanded upon the Iran Sanctions Act of 1996, which focused upon companies with certain investments in Iran’s energy economy. CISADA precludes the award of federal contracts to any person or firm, including its subsidiaries, that engages in sanctionable energy- or weapons-related activities. This preclusion is, however, subject to waiver by the president on any particular contract.

CISADA also sought to influence the states by expressly authorizing state and local governments to “divest the assets of the State or local government from, or prohibit investment of the assets of the State or local government in, any person that the State or local government determines, using credible information available to the public, engages in” prohibited investment activities in Iran. 22 U.S.C. § 8532(b).

The criteria for such investment activities are brief and well-defined. A public entity may “divest” itself of a firm or person if that firm or person:

(1) has an investment of $20,000,000 or more in the energy sector of Iran, including in a person that provides oil or liquified natural gas tankers, or products used to construct or maintain pipelines used to transport oil or liquified natural gas, for the energy sector of Iran; or

(2) is a financial institution that extends $ 20,000,000 or more in credit to another person, for 45 days or more, if that person will use the credit for investment in the energy sector of Iran.

22 U.S.C. § 8532(c). As a consequence, the contracting agency may refuse to award or to renew a contract with the disqualified contractor.

Significantly, CISADA also prescribes the minimum procedural due process that the state or local agency must accord the barred entity. Not less than 90 days before any adverse action is imposed, written notice and an opportunity to respond in writing must be provided to the entity. Finally, Congress exhorted the states and their political subdivisions to make “every effort to avoid erroneously targeting” any person by verifying “that the person engages in [prohibited] investment activities in Iran.” 22 U.S.C. § 8532(d).

As a result, New Jersey passed P.L. 2012, c. 25 (the “State Act”) on July 30, 2012 (effective Aug. 30, 2012). First, it charges the Department of Treasury with creating a list no later than Nov. 30, 2012, of persons and entities that engage in the prohibited investment activities. N.J.S. 52:32-57.3.b. Everyone on the list is to be given the written notification and opportunity to be heard mandated by CISADA (which meant, of course, that the list could not be generated until at least 90 days from the initial written notices). The state act then prohibits any person or entity identified on the list from bidding on, submitting a proposal for, entering into or renewing any contract with a state agency for goods or services. N.J.S. 52:32-57.3.b.

In a separate section, the state act calls for a certification to be submitted at bid submission or contract renewal, certifying “that the person or entity is not identified…as a person or entity engaging in investment activities in Iran” on the Treasury’s list. N.J.S. 52:32-58.4.a. If the person or entity cannot make such a certification “because it or one of its parents, subsidiaries, or affiliates…has engaged in one or more” of the prohibited activities, then the person or entity must provide “the State agency concerned, prior to the deadline for delivery of such certification,” a detailed and precise description of the offending activities. N.J.S. 52:32-58.4.c (emphasis added).

This provision has caused several opposing arguments for two crucial reasons. First, it does not say that the contractor is unable to sign the certification because it or a related entity appears on the Treasury’s list, but rather that it cannot sign because it or a related entity has engaged in prohibited investment activities in Iran. Second, the state act does not define the term “affiliate.” Rather, the state act defines “person or entity” to include “any parent, successor, subunit, direct or indirect subsidiary, or any entity under common ownership or control with” the bidder. N.J.S. 52:32-56.2.e(3). Even if “affiliate” is equated with “common ownership or control,” the state act fails to define the latter.

Finally, the state act also amended the Local Public Contracts Law (LPCL), N.J.S. 40A:11-1, et. seq.; the Public School Contracts Law (PSCL) N.J.S. 18A:18A-1, et. seq.; and the County College Contracts Law (CCCL) N.J.S. 18A:64A-25.1, et. seq. Instead of generating their own lists of prohibited entities, the respective contracting agencies involved “shall rely on the list developed by the State Department of the Treasury.” See, e.g., N.J.S. 40A:11-2.1. Thus, all three procurement statutes fall victim to the same vicissitudes that affect the state act, other than creation of the list of prohibited entities.

Development of the Disclosure Certification Forms

The Treasury’s Division of Purchase and Property (DPP) determined that all public procurements administered by it after Aug. 29, 2012, required a certification of bidders, in order to comply with the state act. Taking the position (although no Treasury list yet existed) that bidders must certify that neither they nor their “parents, subsidiaries, or affiliates” are identified on a list “created and maintained by the [Treasury],” and that they also do not fall within the state act’s definition of prohibited investment activities, the DPP promulgated and included in bid packages a disclosure form. In one state procurement, involving the removal of debris from Hurricane Sandy, a bidder was disqualified because it failed to submit the DPP’s disclosure certification form. In rejecting the bid, the DPP’s director relied upon the bid specifications, which stated that submission of the disclosure form at the time of bid was mandatory. More importantly, though, the director interpreted N.J.S. 52:32-57.3.a’s prohibition as extending beyond the mere inclusion on a (then nonexistent) Treasury list. Each bidder must make a self-determination (and proclamation under oath) that neither it nor its parents, subsidiaries or affiliates violates the state act.

On Jan. 28, the landscape changed with the publication of the first Chapter 25 Treasury list, posted at http://state.nj.us/treasury/purchase/pdf/Chapter25List.pdf. It lists 41 entities, including seven with the word “China” in their titles, a number of oil and gas entities and six banks. Then, in April, the DPP published a new disclosure form, as part of its Standard Forms Packet, posted at http://www.state.nj.us/treasury/purchase/forms/StandardRFPForms.pdf. Unlike its predecessor, the revised disclosure form is limited to a certification that the bidder, its parents, subsidiaries and affiliates either do not appear on the Treasury list, or that one or more do appear on the list. If on the list, then the bidder must submit “a detailed, accurate and precise description of the [investment] activities.” Absent from this revised form is any bidder proclamation that even though it is not on the Treasury list, in effect it should be because the entity engages in the prohibited investment activity.

Although this article has discussed only the DPP’s disclosure forms, the state act encompasses other state agencies and departments, as well as the numerous governmental contracting agencies under the LPCL, PSCL and CCCL. Some public owners still use the “old” DPP form, while others have adapted the new DPP form to their particular agency.

Adjudication of Bid Disputes Arising From the State Act

Protests at the state level surrounding the disclosure of investment activities in Iran have, predictably—given the $20 million thresholds—involved large contracts with major players. In George Harms Construction Co. v. N.J.D.O.T. and Schiavone Construction Co., Docket No. A-3941-12T1 (App. Div. May 22, 2013), the Appellate Division summarily disposed of Harms’ claim that Schiavone’s disclosure form certifying no violation of the state act was incorrect because one of Schiavone’s parent companies was allegedly barred from bidding in California due to Iranian investments. The Treasury had found that neither Schiavone nor any parent was on the Treasury list and that neither entity was barred by California’s version of the state act. The Appellate Division upheld those findings. In Conti Enterprises v. N.J.D.O.T and CCA Civil, Docket No. A. 003941-12 (2013), Conti is currently arguing that while neither CCA Civil nor its lineal parents are on the Treasury list, the People’s Republic of China ultimately controls CCA Civil as well as three entities which are on the list.

Neither case addresses the most concerning issue facing public owners and bidders: Is the failure to include the disclosure certification with the bid a material defect? If the state act is indeed limited to certifying that the bidder and its corporate family are missing from the Treasury list, then a finding of material defect is greatly diminished. Any public owner can check the Treasury list. Additionally, the Stockholder Disclosure Act (N.J.S. 52:25-24.2) mandates the bidder’s listing of all 10 percent or greater owners, and they too can be readily checked against Treasury’s list (should a recalcitrant bidder refuse to provide the omitted certification post-bid). As a practical matter, rejecting typical LPCL, PSCL or CCCL bids from local and often prequalified general or trade contractors, based upon a concern that they or related entities may have invested $20 million or more in Iran’s energy sector, borders on the inane. •