Termination for non-appropriation of funds: Overview, definition, and example
What is termination for non-appropriation of funds?
Termination for non-appropriation of funds is a clause that allows a government agency or public entity to cancel a contract if it doesn’t get the money it expected in its next budget. In plain terms, if the government doesn’t allocate funds to pay for the contract in the future, it can legally back out—no penalties, no breach.
This clause is common in multi-year contracts with government customers, since public entities often can’t guarantee funding beyond one fiscal year.
Why is termination for non-appropriation of funds important?
Government budgets change year to year, and spending must usually be approved annually by lawmakers or other officials. This clause gives government buyers a way to commit to contracts now—without locking themselves into future payments they might not be allowed to make later.
For vendors and service providers, it’s a heads-up: if funding isn’t renewed, the contract could end early through no fault of your own. Knowing this helps you manage risk, especially if you’re doing business with schools, cities, or state or federal agencies.
Understanding termination for non-appropriation of funds through an example
Let’s say your IT company signs a three-year contract with a local school district to provide tech support. The contract includes a termination for non-appropriation clause.
After the first year, the school board decides not to renew the tech budget for the next year. Because of that, the district doesn’t have funds to pay for the rest of the contract—so it invokes the clause and ends the agreement without penalty.
You don’t get paid for the remaining two years, but you also can’t sue for breach of contract. It’s a risk you agreed to when you signed the deal.
An example of a termination for non-appropriation of funds clause
Here’s how this clause might appear in a contract:
“Notwithstanding any other provision of this Agreement, the Customer may terminate this Agreement without further obligation in the event that sufficient funds are not appropriated for the continuation of this Agreement in subsequent fiscal periods. Such termination shall be effective as of the end of the fiscal period for which funds were appropriated.”
Conclusion
Termination for non-appropriation of funds is a legal safety valve for government buyers. It allows them to enter multi-year contracts without overstepping their budget authority.
If you’re selling to a public entity, this clause is something to watch for. It doesn’t mean the deal is unreliable—but it does mean you should plan for the possibility that funding may not last forever. Build that risk into your pricing, planning, and expectations to keep your business protected.
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.