1 O.K THE EFFECT OF THE NEGATIVE PLEDGE ON THIRD-PARTY INTERESTS IN COMMERCIAL LENDING Opeyemi Ifeoluwa Kolawole 1 Email: opeyemikolawole03@gmail.com Introduction A fundamental principle of law is that everyone is free to contract as he wishes, in so far, no illegality is involved. 2 Negative pledge is founded on the right of parties to freely determine their rights, privileges and obligations in a contractual agreement. In corporate finance, negative pledge is designed to address the risk of losing priority encountered by unsecured lenders. The clause imposes on the borrower the duty not to grant security in the charged property to subsequent creditors or to restrict the borrower from using the charged property as security for future loans. 3 The clause effectively operates to secure the priority of the initial creditor against all subsequent security interests created by the borrower on its assets; it operates as an insurance clause. In this vein, it must be noted that parties to an agreement can to a large extent determine the contents of the restrictive terms in the negative pledge clause. The crux of this paper is premised on the extent to which this clause can be activated against third-parties. That is, to what extent can this covenant be enforced against a subsequent creditor who took interests in the borrower’s assets with or without notice of the negative pledge. This paper considers the general nature of the negative pledge clause and its extant variations while arguing that the effect of the clause on third-parties is determined by reference to the intention of the initial creditor and the borrower which can be evinced in the terms of the covenants; whether the clause effectively creates a proprietary and enforceable right for the initial creditor and whether the subsequent creditor who advanced credit without notice of the negative pledge can be made subject of the clause. 1 Opeyemi Ifeoluwa Kolawole, LL. B(IFE), B.L., LL.M(Dublin) is a qualified Barrister and Solicitor of the Supreme Court of Nigeria. He researches on the legal framework of financial collateral for trans-national commercial transactions in the ECOWAS sub-region and Intellectual Property and Technology Transfer and development in the global-south. He is a member of the Lagos Branch of the Nigerian Bar Association. 2 G.H.L Fridman ‘Freedom of Contract (1968) 2 Ottawa Law Review, p 1 3 Carl S. Bjerre ‘Secured Transaction Inside out: Negative Pledge covenants, property and perfection’ [1999] 84 Cornell Law Review, p. 308