Sundowns ruling: When do commission 'clawbacks' fall under contract and not employment law?

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The case arose after Sundowns sought repayment of roughly R7.9m in commission that had been paid upfront to Mosimane’s agent when he signed a four-year employment contract as head coach. Both the agency agreement and Mosimane’s employment contract provided that if he left Sundowns early, the commission would be repayable on a pro-rata basis, with Mosimane accepting joint and several liability for repayment. When he departed after four months, Sundowns sued to enforce those provisions and was successful with its claim.

In subsequent commentary, the case has been described as a precedent on the enforceability of 'clawback' clauses. A closer reading, however, shows that the dispute was not about clawback in the remuneration-law sense, nor did it arise in the context of an employment relationship. The court enforced a contractual repayment obligation, emphasising that this was not an employment dispute, but a matter determined on ordinary contractual principles.

That distinction matters. Because the dispute was not an employment matter, labour legislation – notably the Labour Relations Act, 1995 (LRA) and the Basic Conditions of Employment Act, 1997 (BCEA) – was not engaged. In contrast, true malus and clawback provisions operate within employment and remuneration law frameworks, and must accordingly be designed, applied and enforced with these frameworks in mind.

Even so, Sundowns offers useful lessons about contractual certainty, bargaining power and public policy limits that can be extrapolated to employment practices and remuneration governance.

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Why terminology matters

Precision in terminology is not semantics; it determines which legal framework applies:

• Repayment clauses are straightforward contractual undertakings to repay amounts in specified circumstances, including the repayment of agent commissions (as in Sundowns).
  
• Joint liability undertakings arise where a party agrees to be liable for repayment alongside another party. In Sundowns, Mosimane undertook joint and several liability for the repayment of his agent’s commission (functionally similar to suretyship).

These constructs are conceptually distinct from malus and clawback as those terms are used in remuneration law and governance. Conflating them risks obscuring the very specific purpose of malus and clawback provisions in managing risk and accountability in the context of executive pay.

Malus and clawback in South African law and internationally

The King IV Report on Corporate Governance for South Africa, read with the South African Reward Association’s Guide to the Application of King IV: Principle 14 (Governance of Remuneration), provides clear definitions and practical guidance for the application of malus and clawback provisions:

• Malus refers to pre-vesting forfeiture of variable remuneration (that is, before payment or delivery).
  
• Clawback refers to recoupment of variable remuneration after it has vested or been delivered.
  
• Variable remuneration refers to remuneration that is not guaranteed, commonly in the form of short-term and long-term incentive awards.

The application of malus and clawback are both conditional on clearly defined trigger events; for example, financial or accounting misstatements, breaches of law or regulations, misconduct, serious reputational damage, or material failures in risk management.

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Since malus and clawback operate in an employment context, they engage the labour law framework. Of particular importance is section 34(5) of the BCEA, which prohibits an employer from requiring an employee to repay remuneration except where there has been an overpayment due to an error in calculation. Accordingly:

• Remedial clawbacks (ie. to correct for trigger events that occurred prior to vesting but which were only discovered after vesting) are likely to be lawful under South African labour law.
  
• Punitive clawbacks (ie. to penalise an employee for trigger events that occurred after vesting or delivery) may risk breaching section 34(5) of the BCEA.

In addition, the exercise of a board or remuneration committee’s discretion to apply malus or clawback is subject to the fairness and equity requirements of the LRA. Applied without fair reason or process, such decisions could give rise to unfair labour practice claims in respect of the provision of benefits of employment.

Finally, fault and no fault termination provisions – while they can lead to forfeiture of unvested incentive awards – are conceptually distinct from malus. They govern outcomes when employment ends for reasons typically classified as fault based or no fault. In general, misconduct, poor performance or resignation results in forfeiture, whereas death, disability or illness, retrenchments, or retirement at the normal or agreed date typically trigger pro rated vesting on termination.

International clawback practice

These South African principles align with international law and practice. In the United States, Rule 10D-1 of the Securities Exchange Act, 1934 requires all issuers listed on the New York Stock Exchange or Nasdaq to adopt written clawback policies. These must provide for the recovery of incentive-based compensation erroneously awarded in the three years preceding an accounting restatement, and recovery must occur 'reasonably promptly'.

In the United Kingdom, the revised Corporate Governance Code 2024 (Code) introduces more robust requirements regarding malus and clawback. Provisions 37 and 38 confirm that boards should exercise discretion to override purely formulaic outcomes, and mandate that directors’ contracts, as well as remuneration schemes and policies, must include malus and clawback provisions. These provisions must specify the circumstances in which they may be exercised, the duration of their application, and whether they have been enforced.

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Companies are required to disclose these details in their remuneration reports, providing a clear justification for the chosen period and the rationale for applying malus or clawback. The Financial Reporting Council’s accompanying Guidance on the Code suggests a range of potential trigger events, including erroneous data, misstatements of accounts, misconduct, serious reputational damage, and corporate failure.

The international trajectory is clear: malus and clawback provisions are no longer discretionary embellishments but central features of remuneration governance.

Lessons from Sundowns

Although not an employment case, Sundowns remains instructive. The court enforced repayment because the clauses were clear, the parties contracted with eyes open, and the principle of pacta sunt servanda prevailed. Unambiguous drafting was decisive, and freely negotiated contractual obligations between sophisticated parties were upheld, absent manifest unfairness or conflict with constitutional values.

Those same themes should inform remuneration governance. Malus and clawback provisions stand or fall on the clarity of their drafting and the robustness of procedures by which boards apply them. The case also underscores the significance of relative bargaining power. Senior executives who negotiate at arm’s length will face an uphill battle to re-characterise carefully drafted malus or clawback provisions as unfair or onerous.

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Practical implications

Two practical consequences follow. Repayment terms of the Sundowns type are purely contractual and, where properly drafted, enforceable as such. They are appropriate for securing the repayment of agent commissions, and they do not engage the BCEA’s repayment prohibition or the LRA’s unfair labour practice provisions because they are not situated in an employment relationship and do not amount to remuneration.

By contrast, where boards adopt malus and clawback provisions in the context of an employment relationship, greater care is essential. They should be framed as remedial tools, tied to objectively defensible trigger events, recorded clearly in remuneration policies, incentive scheme rules, and award letters, and applied through a fair and documented process affording employees an opportunity to respond before any final decision is made.

Temporal scope should be consciously selected and justified – the US’s 'three-year look-back' and the UK’s expectation of disclosure (including the period selected and why) are sensible benchmarks for South African practice, even in the absence of binding local rules. Transparency in the remuneration report – explaining scope, triggers, clawback periods and application – builds shareholder and market trust and reduces the risks of disputes.

Finally, tax deserves separate attention. Malus and clawback do not amount to 'restrictions' for purposes of section 8C of the Income Tax Act, 1962 and therefore do not defer vesting.

Conclusion

The Sundowns case was not a clawback case in the remuneration sense. It was a contractual repayment dispute outside the realm of employment law. Yet the judgment’s deeper message – clarity in drafting, respect for agreements freely made, and principled limits on public policy intervention – bodes well.

For South African boards, the central discipline is to separate pure repayment obligations from malus and clawback; recognise that labour law governs the latter; and draft, disclose, and apply these provisions with the precision, fairness and transparency that good corporate governance demands.