In a financial or business setting, “clawback” may refer to a provision in a contract that allows money or benefits to be taken back if special circumstances arise. A common example is where insurance premiums can be refunded or “clawed back” if the insurance policy is cancelled within a given time period. Clawback provisions can be found in many types of business contracts.
In many respects, clawback provisions have been criticized due to their link with corporate abuses in the past. But given the right conditions, clawback provisions can often provide benefits for both the distributor and the recipient of the funds. Since clawback provisions are usually part of a contract, both the distributor and the recipient will have mutually agreed to the clawback provision in advance.
Clawback lawsuits can involve many different types of subject matter. Some common arrangements involving clawbacks include:
- Insurance premiums: Insurance policies often include a clawback provision allowing the premiums to be clawed back if the policy gets cancelled before a set date
- Purchase of securities: Some securities are linked to taxable benefits that depend on the holding period for the security. If the investment is sold before it reaches maturity, the benefits can be subject to clawback
- Employee bonuses: In some companies, highly-paid employees receive pay bonuses that are deferred (i.e., can’t be spent immediately by the employee). The company might then hold back the benefits and make them contingent on the employee’s performance. If the employee’s performance is not satisfactory, the firm may then revoke or claw back the bonuses and use them towards company investments
Thus, most clawbacks are enforced as a means of protecting a company or corporation from financial crisis or heavy losses. By requiring party to sign a clawback provision, the company is able to recoup some its funds and devote them towards restructuring.
A clawback lawsuit, or clawback litigation, involves some dispute over a clawback provision. For example, if a party agreed to a clawback provision, but doesn’t refund the monies when required, they could face a lawsuit by the company that distributed the benefits. The recipient might then be required to refund the benefits as required, and pay any additional losses they may have caused.
Conversely, a person might sue a company if they believe that the company has abused their rights to clawbacks, or if the company’s clawback policies involve some form of discrimination.
Again, many clawback practices have come under question, especially those involving clawbacks of employee bonuses. However, if the employee has signed a contract involving a clawback provision, they will need to resort to contract laws in order to obtain a remedy (for example, if a breach of contract is involved).
Clawback provisions can often be difficult to understand without the assistance of a lawyer. If you have any questions or disputes involving clawbacks, you may need to hire an experienced business lawyer for advice. Your lawyer can provide guidance even before you sign a clawback provision, so that you understand your rights. Or, if a clawback lawsuit becomes necessary, your lawyer can represent you during trial.