What Is a Clawback Clause?
In the world of sports and business, clawback clauses appear in the contracts to hold parties accountable. Participants in these contracts make promises to meet certain performance goals in exchange for compensation. These performance goals consist of manner of conduct or quantifiable goals. Manner of conduct goals consist of the behavior of the participant. Quantifiable goals refer to adding a specific number of jobs or reaching a minimum level of income. A clawback clause allows one party to request repayment of the compensation paid if the other party fails to meet his goals.
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Original Agreement
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When two parties enter into an agreement, one party agrees to provide specific results in exchange for payment. These results vary depending on the nature of the contract. A sports contract may require a college coach to not engage in paying potential players to choose her college while recruiting players. A business contract may pay an incentive to company executives for hiring a predetermined number of local residents for new jobs.
Contract Enactment
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Once the contract term begins, both parties need to fulfill their obligations. The first party starts compensating the second party as scheduled in the contract. The second party needs to perform as agreed in the contract. If the second party fails to perform, the first party can invoke the clawback clause, which requires the second party to repay the money it received.
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Advantages
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Advantages exist for both parties who enter a contract with a clawback clause. The first party enjoys the advantage of knowing it has recourse if the second party fails to meet its obligations. The second party enjoys the advantage of the added credibility it has when it lives up to its commitment. This builds a relationship of trust between the second party and the first.
Disadvantages
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Disadvantages also exist for both parties to a clawback clause. The first party faces the potential of losing the contract if the second party disagrees with the terms of the clawback clause. The second party faces the potential of repaying the money if circumstances prevent him from meeting the terms of the contract. For example, a change in the economy might prevent a business owner from adding a specified number of jobs in a city.
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