Clawback

Term Main definition
Clawback

A contractual provision that requires one party to repay something to another party.

A clawback is a recapturing of something previously possessed.  The other party had something that the other party paid.  The party that received that payment hopes to retain it.  However, if the contract provides for a clawback, the party will be required to return the payment under specified conditions.  The term refers to the idea that the other party is entitled to pull back something previously transferred.  If the party has received from the other party any amount as to which clawback is permitted, the party who previously paid would be entitled to a payment from the party who previously received the payment.  Usually a clawback is a penalty mandated by law.  In cases where a clawback is voluntary, it serves the purpose of reconciling amounts at a later date that had been paid to a party based on an estimate that proved too high or low.  For instance, a fund manager for a venture capital, private equity or hedge fund is usually entitled over the life of the fund to a percentage of the gains and losses on disposition of portfolio investments; and occasionally the fund's managers will receive a greater share of the fund's distributions than what the fund's investors agreed and bargained for, which the fund's manager agrees to repay. Generally, the general partner of the fund may not keep more than a specified percentage (e.g., 20%) of the fund's cumulative gains (and thus must return any "excess" to the fund's limited partners).