Non-appropriation of funds: Overview, definition, and example
What is non-appropriation of funds?
Non-appropriation of funds is a contract provision that allows a government entity to terminate an agreement if funding is not allocated for future payments. This clause protects public agencies from financial obligations if legislative bodies do not approve the necessary budget in subsequent years.
For example, if a city government enters a multi-year contract for IT services but the budget for the next fiscal year does not include funding for the contract, the city can invoke the non-appropriation of funds clause to exit the agreement without penalty.
Why is non-appropriation of funds important?
This clause is important because it ensures that government entities are not legally bound to financial commitments beyond their approved budgets. Since public funds are allocated on an annual basis, non-appropriation clauses allow agencies to sign multi-year contracts without violating budget laws.
For vendors working with government clients, understanding this provision is essential, as it introduces the risk that funding may not be renewed, leading to contract termination.
Understanding non-appropriation of funds through an example
Imagine a state agency signs a five-year lease for office equipment. The contract includes a non-appropriation of funds clause stating that if funding is not approved in any subsequent year, the agency can terminate the lease without penalty.
In year three, the state legislature does not allocate funding for the lease, so the agency exercises the non-appropriation clause to exit the agreement. The vendor must retrieve the equipment and cannot demand further payments.
In another case, a public school district enters a contract with a technology provider for online learning software. If the district’s budget does not include funds for the contract renewal, the non-appropriation clause allows the district to discontinue the agreement without financial liability.
An example of a non-appropriation of funds clause
Here’s how a clause like this might appear in a contract:
“The continuation of this Agreement is contingent upon the appropriation of funds by the applicable legislative body. If sufficient funds are not appropriated to fulfill the obligations under this Agreement for any subsequent fiscal year, the Agency may terminate this Agreement without penalty, effective upon written notice to the Provider.”
Conclusion
Non-appropriation of funds clauses allow government entities to enter multi-year contracts while ensuring they are not financially obligated if future funding is unavailable. This provision protects public agencies from budget uncertainties while ensuring vendors understand the potential risks of contract termination due to lack of funding.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.