er or not such rates are approved in or accepted by the relevant jurisdiction;

(3) Premium income from contract bonds guaranteed by any government agency (Federal, State or local) does not exceed one-quarter of the total contract bond premium income of the surety;

(4) Underwriting authority for SBAguaranteed bonds is vested only in employees of the surety company;

(5) Final settlement authority for claims under the PSB program is vested in employees of a PSB surety's permanent claims department satisfactory to SBA;

(6) Number of bid and final contract bonds issued by the surety from year to year for the last five fiscal years;

(7) The rating or ranking designations assigned to the surety by recognized authority.

(e) Duration of PSB program. The PSB program shall terminate on September 30, 1994, unless extended by Act of Congress. SBA guarantees effective under this program on or before September 30, 1994, shall remain in effect after such date.

(f) Participation in PSB program. A surety authorized to issue, monitor, and service surety bonds subject to SBA's guarantee without obtaining prior SBA approval, shall not be eligible to submit applications under subpart B.

(g) Timeliness. (1) SBA's guarantee of a bond will be honored only if issued or approved before the work under the contract has begun. To establish the exact bond issuance or approval, as the case may be date, a surety shall maintain a contemporaneous record of the issuance or approval, as the case may be of each bond (OMB Approval No. 3245-0007).

(2) For purposes of this paragraph (g), work on a job shall be considered as having begun when a contractor takes any action at the job site which exposes its surety to liability under applicable law.

(3) SBA may guarantee a bond issued or approved, as the case may be after work on the contract has begun, but only by the signature on Form 991 (OMB No. 3245-0007) of an SBA official having delegated authority to approve contract amounts such as underlie the

bond in question (see §101.3-2, part III(c) of this chapter), upon receipt of all of the following from the surety:

(i) Evidence (certified copy of contract or sworn affidavit) from the principal that the surety bond requirement was contained in the original job contract, or documentation satisfactory to SBA, as to why a surety bond was not previously secured and is now being required.

(ii) A certification by the principal listing all suppliers and indicating that they are paid to date, attaching a waiver of lien from each; that all taxes and labor costs are current; that all subcontractors are paid to their current status of work and a waiver of lien from each, or an explanation satisfactory to SBA why such documentation cannot be produced.

(iii) A certification by obligee that all payments due under the contract to present status have been made and that the job has been satisfactorily completed to present status.

[54 FR 47169, Nov. 9, 1989, as amended at 55 FR 10225, Mar. 20, 1990; 56 FR 627, Jan 8, 1991] §115.11 Definitions.

This section includes terms defined at 15 U.S.C. 694a and provides definitions of other terms.

Affiliate is defined in §121.3(a) of this chapter.

Amount of contract. The amount of the contract to be bonded shall be established as of the time of issuance of the executed and guaranteed bond or bonds. The contract amount shall not exceed $1,250,000 in face value. The amounts of two or more contracts for a single project, to be performed in phases, shall not be aggregated if the prior bond is released (other than for maintenance or warranty-see definition of "contract" in this section) before the beginning of each succeeding phase. A "single project" means one represented by two or more contracts of one principal or its affiliates with one obligee or its affiliates for performance at the same locality, irrespective of job title or nature of the work to be performed. A service or supply contract covering more than a one-year period shall be eligible if the annual contract amount and the penal sum of the bond do not exceed $1,250,000 at any time.

Ancillary bond means a bond incidental and essential to the performance of the contract to which SBA's guarantee pertains.

Approval or approved with respect to a bond or bonds means the approval by an employee of a PSB Surety, authorized to approve the bond or bonds in question.

Bid bond means a bond conditioned upon the bidder on a contract (not to exceed a contract amount of $1,250,000) entering into the contract, if bidder receives the award thereof, and furnishing the prescribed payment bond and performance bond. A bid bond guarantee shall expire 120 days after issuance of the bond, unless surety notifies SBA in writing before such 120th day that a later expiration date is required, stating such date.

Contract means an obligation of the principal requiring the furnishing of services, supplies, labor, materials, machinery, equipment or construction (including a warranty up to two years if such warranty is limited to defective materials or workmanship). The contract shall not be a permit, subdivision contract, lease, land contract, evidence of debt, financial guarantee (e.g., a contract requiring payment(s) by principal to obligee), warranty of performance or efficiency, warranty of fidelity, or release of lien (other than for claims under a guaranteed bond) nor shall a contract prohibit a surety from performing the contract upon default of the principal. A warranty in excess of two years or against other than defective materials or workmanship shall not be covered by SBA's guarantee unless SBA, by a separate writing signed by surety and SBA, agrees to a warranty in excess of two years from completion or for other than materials and workmanship, ancillary to an other wise eligible contract, if such warranty is the immediate contractual responsibility of the principal, upon a showing that such warranty is customarily required in the relevant trade or industry.

Contractor means the person with whom the obligee contracts to perform the contract.

Imminent Breach means a threat to the successful completion of a bonded contract wh less remedied by

surety, makes a default under the bond appear to be inevitable.

Issuance or issued means the release of the SBA-guaranteed executed bond by the surety which binds surety to the contract.

Loss shall have the following meanings: (a) Loss Under Bid Bond. In the case of a bid bond, the lesser of the penal sum or the sum which is the difference between the bonded bid and the next higher responsive bid, less any amounts recovered by reason of the principal's defenses against the obligee's demand for performance by the principal and less any sums recovered from indemnitors and other salvage.

(b) Loss Under Payment Bond. In the case of a payment bond, at the surety's option, the sums necessary to pay all just and timely claims against the principal which are for the value of labor, materials, equipment and supplies furnished for use in the performance of the contract, and to pay other debts of the principal for which the surety is liable under the bond, or the penal sum of the payment bond, with interest and related court costs and attorney's fees, if any, less any amounts recovered (through offset or otherwise) by reason of the principal's claims against laborers, materialmen, subcontractors, suppliers or other rightful claimants, and less any sums recovered from indemnitors and other salvage.

(c) Loss Under Performance Bond. In the case of a performance bond, at the Surety's option, the sums necessary to meet the cost of fulfilling the terms of a contract, or the penal sum of the bond, with interest and related court costs and attorneys fees, if any, less amounts recovered (through offset or otherwise) by reason of the principal's defenses or causes of action against the obligee and less any sums recovered from indemnitors and other salvage.

(d) Loss under Ancillary Bond means a loss covered by that bond and attributable to the particular contract for which SBA-guaranteed payment or performance bonds were issued.

(e) Loss adjustment expense. Amounts actually paid, specifically allocable to the investigation, adjustment, negotiation, compromise, settlement of or resistance to a given claim

(including court costs and reasonable attorney's fees) for loss resulting from the asserted breach of the terms of any guaranteed bond, but excluding all unallocated or overhead expenses of surety. Any allocation method must be reasonable and in accord with generally accepted accounting principles.

(f) Loss from litigation cost. Expenses shall also include court costs and reasonable attorney's fees incurred in suits to enforce mitigation of loss as defined in paragraphs (a) through (d) of this definition, including suits to obtain sums due from obligees, indemnitors, prinicipals and others, but no such expense shall be paid for any such suits filed against the United States of America or any of its agencies, officers or employees unless the surety has, prior to filing such suit, received written concurrence from SBA that such suit may be filed, or unless such claim is asserted as a cross-claim or counterclaim.

(g) Loss from attorneys' fees and damages. "Loss" shall not include attorney's fees and court costs incurred by a surety in a suit by or against SBA or its Administrator, and shall not include such costs or payments (e.g., tort damages) arising out of a successful suit sounding in tort initiated under the bond by a principal or any otter person against such strety.

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event of a breach by the principal of the conditions of a payment bond or performance bond. No person shall be named co-obligee on the bond or on a rider to the bond unless such person (including a lender to the original obligee) is bound by the contract to the principal or to the surety, if surety has arranged completion of the contract, to the same extent as the original obligee or unless such co-obligee is a Federal department or agency. In no event may the aggregate liability of the surety exceed the penal sum of the bond.

Payment bond means a bond conditioned upon the payment by the Principal of money to persons who furnish labor, materials, equipment and sup plies for use in the performance of the contract, and to other persons who have a right of action against such bond.

Performance bond means a bond conditioned upon the completion by the principal of a contract in accordance with its terms. Such bond shall not prohibit a surety from performing the contract upon defauit of the principal. Person means a natural person or a legal entity.

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PSB means the Preferred Surety Bond Program (See "PSB Surety" above).

Surety means the person which is listed by the U.S. Treasury, see §115.10(c), and is a corporation determined by SBA to be a surety eligible to participate in this program, which has entered into a Surety Bond Guarantee Agreement or a Preferred Surety Bond Agreement with SBA and:

(a) Under the terms of a bid bond, undertakes to pay a sum of money to the obligee in the event the principal breaches the conditions of the bond;

(b) Under the terms of a performance bond, undertakes to pay a sum of money or to incur the cost of fulfilling the terms of a contract in the event the principal breaches the conditions of the contract; or

(c) Under the terms of a payment or an ancillary bond, undertakes to make payment to all persons supplying labor and material in the prosecution of the work under the contract and who have a right of action against the bond under local law, or

(d) Is an agent, independent agent, underwriter, or any other company or individual empowered to act on behalf of such person.

[54 FR 47169, Nov. 9, 1989, as amended at 55 FR 10225, Mar. 20, 1990]

§ 115.12 Eligibility of principal.

In order to be eligible for a bond guaranteed by SBA, the principal must:

(a) Size. Qualify as a small business under part 121 of this chapter;

(b) Character. Possess good character and reputation. A Principal will be deemed to meet this standard if each owner of twenty percent or more of its equity, and each of its officers, directors, or partners possesses good character and reputation. Good character and reputation shall be presumed absent when any such person:

(1) Is under indictment (pending disposition of such indictment) for or convicted of a felony, or has suffered an adverse final civil judgment that he or she has committed a breach of trust or the violation of a law or regulation protecting the integrity of business transactions business relationships;

or

(2) A regulatory authority has revoked, cancelled or suspended the license of such person necessary to perform the contract; or

(3) Has obtained a bond guarantee by fraud or material misrepresentation (as these terms are defined in §115.13), or has failed to keep Surety informed of unbonded contracts or a contract bonded by another surety as required by a bonding line commitment pursuant to § 115.36.

(c) Need for bond. Certify that a bond is required in order to bid on a contract or to serve as a prime contractor or subcontractor thereon;

(d) Availability of bond. Certify that a bond is not obtainable on reasonable terms and conditions without SBA's bond guarantee assistance; and

(e) Partial subcontract. Certify the percentage of work under the contract to be subcontracted. SBA will not guarantee bonds for contractors who are primarily brokers or packagers, see § 124.109(a) of this chapter.

(f) Debarment. Certify that applicant is not presently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from transactions with any Federal department or agency, pursuant to governmentwide debarment and suspension rules. See, e.g., part 145 of this chapter, and 48 CFR subpart 9.4. Compliance with 13 CFR 145.510 shall satisfy this requirement, i.e., if surety has on file applicant's SBA Form 1624.

$115.13 Defenses of SBA.

In addition to equitable and legal defenses and remedies afforded by the general law of contracts, the statute and these regulations, SBA shall be relieved of all liability under any Surety Bond Guarantee, if:

(a) Excess contract amount. The total contract amount at the time of issuance of the bond or bonds exceeds $1,250,000 in face value; or

(b) Misrepresentation. The surety obtained the guarantee agreement or applied for reimbursement for losses by fraud or material misrepresentation. Material misrepresentation includes (but is not limited to) both the making of an untrue statement of material fact and the omission of a statement of material fact necessary to make a state

ment not misleading in light of the circumstances in which it was made, and includes the adoption by the surety of a material misstatement made by others which the surety knew or under generally accepted underwriting standards should have known to be false or misleading. Failure by the surety (as defined in §115.11) to disclose its ownership (or the ownership by any owner of twenty percent or more of its equity) of an interest in a principal or an obligee shall be deemed the omission of a statement of material fact; or

be

(c) Material breach. The surety has committed a material breach of one or more terms or conditions of its guarantee agreement, whether under PSB or otherwise. For purposes of this paragraph, a material breach or breaches of such terms or conditions shall deemed to have occurred if such breach (or such breaches in the aggregate) causes an increase in SBA's bond liability of at least 25 percent or $50,000 whichever is less, or if one of the statutory conditions (see §115.30(a)) is not met; or

(d) Regulatory violation. The surety has substantially violated the SBA regulations as published in 13 CFR chapter I, and amended from time to time by publication in the FEDERAL REGISTER. For purposes of this paragraph, a substantial violation shall be one which increases the Agency's bond liability by more than 25 percent or $50,000 in the aggregate, whichever is less, or is contrary to the purposes of the program (see §115.10(a)) or to the mission of SBA (see section 2 of the Small Business Act, 15 U.S.C. 631) or to national policy as stated in SBA regulations (see, for example and not as limitation, parts 112, 113, 116, 117 and 145 of this chapter); or

(e) Alteration. Surety agrees to or acquiesces in any material alteration in the terms, conditions or provisions of the bond(s), including but not limited to the following acts, without obtaining prior written approval from SBA which may be conditioned upon payment of additional fees:

(1) Name as an obligee on the bond(s) or on a rider to the bond any party (other than a Federal department or agency) which is not bound by the contract to the principal, or to the surety

if surety has arranged completion of the contract, to the same extent as the original obligee; or

(2) Make any alterations in bond(s) issued with SBA's prior approval which would increase the bond(s) liability by more than either 25 percent, or $50,000 in the aggregate, whichever is less. See also §§ 115.10(g), 115.30(a), 115.31(c), and 115.60(c)(4).

Subpart B-Guarantees Subject to Prior Approval

§ 115.30 Procedure for surety bond guarantee assistance.

(a) General. By submitting an application to SBA for a bond guarantee, surety shall be deemed to certify that the contractor is a small business concern, that the bond is expressly required by the terms of the bid solicitation or the contract (as the case may be), that the contractor is not able to obtain such bond on reasonable terms and conditions without an SBA guarantee, that the terms and conditions of the proposed bond are reasonable in the light of the risks involved and the extent of the surety's participation, and that there is a reasonable expectation that the principal, if awarded the contract, will perform the conditions of the contract with respect to which the bond is required.

(b) Application for guarantee. Application for an SBA guarantee (including a bonding line application-see also §115.36(c)) is made by the contractor and the surety on a form "Application for Surety Bond Guarantee Assistance," SBA Forms 994 and 994B or C (Underwriting Review), respectively (OMB Approval No. 3245-0007). Except for premiums, contractor shall itemize on SBA Form 994 (Application for Surety Bond Assistance) all payments made, or to be made, by contractor to surety (as defined in §115.11) for whatever purpose as a condition of, or in connection with, the issuance of the bond(s) to be guaranteed by SBA. Contractor and surety, respectively, shall disclose, by separate attachment to SBA Forms 994 and 994B or C, to the best of their knowledge any business and close family relationship between them (for definition of "close relative," see §120.2-2(d) of this chapter). No neg