diff --git a/src/snowflake/cli/_plugins/nativeapp/codegen/templates/templates_processor.py b/src/snowflake/cli/_plugins/nativeapp/codegen/templates/templates_processor.py
index 9e38eecc2c..a16e1dc933 100644
--- a/src/snowflake/cli/_plugins/nativeapp/codegen/templates/templates_processor.py
+++ b/src/snowflake/cli/_plugins/nativeapp/codegen/templates/templates_processor.py
@@ -58,38 +58,45 @@ def expand_templates_in_file(
         if src.is_dir():
             return
 
-        with self.edit_file(dest) as file:
-            if not has_client_side_templates(file.contents) and not (
-                _is_sql_file(dest) and has_sql_templates(file.contents)
-            ):
-                return
-
-            src_file_name = src.relative_to(self._bundle_ctx.project_root)
-            cc.step(f"Expanding templates in {src_file_name}")
-            with cc.indented():
-                try:
-                    jinja_env = (
-                        choose_sql_jinja_env_based_on_template_syntax(
-                            file.contents, reference_name=src_file_name
+        src_file_name = src.relative_to(self._bundle_ctx.project_root)
+
+        try:
+            with self.edit_file(dest) as file:
+                if not has_client_side_templates(file.contents) and not (
+                    _is_sql_file(dest) and has_sql_templates(file.contents)
+                ):
+                    return
+                cc.step(f"Expanding templates in {src_file_name}")
+                with cc.indented():
+                    try:
+                        jinja_env = (
+                            choose_sql_jinja_env_based_on_template_syntax(
+                                file.contents, reference_name=src_file_name
+                            )
+                            if _is_sql_file(dest)
+                            else get_client_side_jinja_env()
                         )
-                        if _is_sql_file(dest)
-                        else get_client_side_jinja_env()
-                    )
-                    expanded_template = jinja_env.from_string(file.contents).render(
-                        template_context or get_cli_context().template_context
-                    )
-
-                # For now, we are printing the source file path in the error message
-                # instead of the destination file path to make it easier for the user
-                # to identify the file that has the error, and edit the correct file.
-                except jinja2.TemplateSyntaxError as e:
-                    raise InvalidTemplateInFileError(src_file_name, e, e.lineno) from e
-
-                except jinja2.UndefinedError as e:
-                    raise InvalidTemplateInFileError(src_file_name, e) from e
-
-                if expanded_template != file.contents:
-                    file.edited_contents = expanded_template
+                        expanded_template = jinja_env.from_string(file.contents).render(
+                            template_context or get_cli_context().template_context
+                        )
+
+                    # For now, we are printing the source file path in the error message
+                    # instead of the destination file path to make it easier for the user
+                    # to identify the file that has the error, and edit the correct file.
+                    except jinja2.TemplateSyntaxError as e:
+                        raise InvalidTemplateInFileError(
+                            src_file_name, e, e.lineno
+                        ) from e
+
+                    except jinja2.UndefinedError as e:
+                        raise InvalidTemplateInFileError(src_file_name, e) from e
+
+                    if expanded_template != file.contents:
+                        file.edited_contents = expanded_template
+        except UnicodeDecodeError as err:
+            cc.warning(
+                f"Could not read file {src_file_name}, error: {err.reason}. Skipping this file."
+            )
 
     @span("templates_processor")
     def process(
diff --git a/tests/nativeapp/codegen/templating/test_templates_processor.py b/tests/nativeapp/codegen/templating/test_templates_processor.py
index 21c7160d06..65eb5b3dac 100644
--- a/tests/nativeapp/codegen/templating/test_templates_processor.py
+++ b/tests/nativeapp/codegen/templating/test_templates_processor.py
@@ -28,7 +28,10 @@
 from snowflake.cli.api.exceptions import InvalidTemplate
 from snowflake.cli.api.project.schemas.v1.native_app.path_mapping import PathMapping
 
-from tests.nativeapp.utils import CLI_GLOBAL_TEMPLATE_CONTEXT
+from tests.nativeapp.utils import (
+    CLI_GLOBAL_TEMPLATE_CONTEXT,
+    TEMPLATE_PROCESSOR,
+)
 
 
 @dataclass
@@ -213,3 +216,24 @@ def test_file_with_undefined_variable():
         assert "does not contain a valid template" in str(e.value)
         assert bundle_result.output_files[0].is_symlink()
         assert bundle_result.output_files[0].read_text() == file_contents[0]
+
+
+@mock.patch(CLI_GLOBAL_TEMPLATE_CONTEXT, {})
+@mock.patch(f"{TEMPLATE_PROCESSOR}.cc.warning")
+def test_expand_templates_in_file_unicode_decode_error(mock_cc_warning):
+    file_name = ["test_file.txt"]
+    file_contents = ["This is a test file"]
+    with TemporaryDirectory() as tmp_dir:
+        bundle_result = bundle_files(tmp_dir, file_name, file_contents)
+        templates_processor = TemplatesProcessor(bundle_ctx=bundle_result.bundle_ctx)
+        with mock.patch(
+            f"{TEMPLATE_PROCESSOR}.TemplatesProcessor.edit_file",
+            side_effect=UnicodeDecodeError("utf-8", b"", 0, 1, "invalid start byte"),
+        ):
+            src_path = Path(
+                bundle_result.bundle_ctx.project_root / "src" / file_name[0]
+            ).relative_to(bundle_result.bundle_ctx.project_root)
+            templates_processor.process(bundle_result.artifact_to_process, None)
+            mock_cc_warning.assert_called_once_with(
+                f"Could not read file {src_path}, error: invalid start byte. Skipping this file."
+            )
diff --git a/tests/nativeapp/utils.py b/tests/nativeapp/utils.py
index 4a614bbbda..2eb4c852d1 100644
--- a/tests/nativeapp/utils.py
+++ b/tests/nativeapp/utils.py
@@ -62,6 +62,10 @@
     f"{APP_PACKAGE_ENTITY}.verify_project_distribution"
 )
 
+CODE_GEN = "snowflake.cli._plugins.nativeapp.codegen"
+TEMPLATE_PROCESSOR = f"{CODE_GEN}.templates.templates_processor"
+ARTIFACT_PROCESSOR = f"{CODE_GEN}.artifact_processor"
+
 SQL_EXECUTOR_EXECUTE = f"{API_MODULE}.sql_execution.BaseSqlExecutor.execute_query"
 SQL_EXECUTOR_EXECUTE_QUERIES = (
     f"{API_MODULE}.sql_execution.BaseSqlExecutor.execute_queries"