O2 Contract buyout… Unlawful penalty?
Posted by Dave in Handsets, Mobiles, Networks, tags: iPhone 3GS, O2, penalty chargesI’ve been thinking about this for most of yesterday and the more I think about O2 expecting you to pay for breaking your contract if you want to upgrade to the iPhone 3GS the more I compare it to the bank charges situation.
The banks of course have been charging people for breaching the terms and conditions of their accounts by going over limits, allowing transactions to bounce etc etc and a few years ago the consumer struck back and challenged the banks on if the charges were fair. This is still being argued in the courts but the general result is no they are not because the banks cannot justify them as being proportionate to their loss.
So lets examine the O2 case, if someone breaches their contract O2 then lose the remaining line rental. So to balance that out they charge someone the remaining line rental as a cancellation charge. Sounds fair doesn’t it? Lets examine the line rental though
From what I can gather there are three major elements to the line rental on a contract phone these are
- Subsidy – The discount O2 gave you off the price of the handset in order to entice you to buy it
- Profit – All companies make profit (well these days we might question that with companies going bust left right and centre). Profit is good
- Costs – Providing the service to you costs money in the way of maintaining the network, providing minutes/texts, customer service, billing etc etc
Now we can reasonably expect O2 to recover the costs from the subsidy and the profit as these are losses O2 will make from the breach but what about those costs? O2 are not providing a service to you at least for the remainder of that contract (they will be if you take a new iPhone 3GS contract but the costs will be factored into that contract and not the one thats been cancelled) so their costs will be zero. So attempting to recover those costs is not proportionate to their loss, hence a penalty and hence unlawful.
So the big question is how much of the line rental is broken down into which element. Well thats a tricky one and one O2 didn’t want to answer when I put it to them on twitter. The only bit that can be reasonably calculated is the subsidy as well which for a customer on iPhone 35 is £7.34 a month and for a customer on iPhone 45 is £7.33. This is calculated by deducting the cost of the equivalent simplicity plan which is unsubsidised away from the cost of the iPhone plan.
Whilst I am no legal expert, I do frequent forums which deal with legal issues and the bank charges issue and I am pretty confident O2 expecting people to pay the costs element of the line rental for a service they will no longer be providing in a cancellation charge is unfair, a penalty and consequently unlawful for the same reasons as the bank charges. However I take no responsibility if anyone wishes to pursue that in court and loses. However if I am right it doesn’t just affect anyone who has cancelled to upgrade to the iPhone 3GS with O2 but anyone who has ever cancelled their contract and not just with O2 but with any other network and that could open flood gates just like it did with the banks
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Nope, sorry, you’re wrong.
Their “loss” is your full monthly charge x however many months, because that’s the amount they would have had if you kept to the contract. It’s not a penalty, because you agreed to pay them that much in the first place. They’re entitled to that money, it’s not a penalty because that would imply it was a levy on top of your charges.
Think of it this way: if you paid them £1000 upfront, for 18 months free use of an iPhone, would you expect a £300 refund if you then chose not to keep using the phone after 12 months?
In the case of the banks, they say £10 is a ‘fee’ for un-authorised overdrafts, but in reality their costs are nothing like that. So it was judged unfair – the banks don’t lose out by £10 if you’re 50p in the red.
Sorry not wrong
By cancelling your contract, O2 do lose out in terms of the subsidy and any profit they calculated when offering that contract.
However, they also gain as they no longer need to provide the service to you which saves them money in terms of operating costs. In spite of this saving they are still billing the consumer for it hence making a double saving as they no longer have to provide a service but are still getting paid for it thus making further profit.
When charging for breaking a contract they are only allowed to charge an amount that is a genuine pre estimate of their costs for that breach. By making further profit from the breach they are benefiting from it just like the banks were. Hence penalty!
Not really. If you cancel a contract, their loss is the total sum of that contract because that’s what you agreed to pay.
You imply that they would gain twice: once on the payment and once on not having to let you make calls. But it doesn’t matter: if you don’t make any calls, you’re not entitled to a refund on a service you haven’t used. You pay regardless of whether you use the service or not.
If you choose to break a legally binding contract, then enter into another with the same company, that’s up to you. But to say that it’s a penalty is wrong – the first payments are for your original service agreement. The second contract is for a different agreement NOT the same service you’d have had anyway. Two separate contracts, two separate services.
They make it so you can do it one lump sum, but it’s still two contracts that just happen to be concurrent. That’s what my wife did last year to get the 3G: stopped using her old O2 phone and got a new one. But she doesn’t get a refund for not using the first phone, whether she pays in one lump sum or just lets it run it’s course.
In your wifes case though she still had two contracts running and O2 were providing a service to her on both those contracts. The fact she didn’t use the other contract doesn’t matter the service was provided and was available to use. In fact that happens on most contracts as the majority of people don’t even get close to using their allotted minutes and texts and you quite rightly say those people wouldn’t be entitled to refunds for the unused portion.
However by buying out a contract, that contract then ends. For the remaining months of that contract, no service is provided as service is now provided on the new contract. Only one contract is running so O2 are only within their rights to charge for providing a service for the one that is running.
Actually your wifes approach is something I’m considering were I to upgrade to the 3GS as I can’t afford the bulk sum to buy my contract out (and it is by no means certain I will even bother upgrading). I have two contracts running at the moment on O2 and a mobile broadband one on orange. The O2 contracts are an iPhone one which is for me and a normal one which is my girlfriends as she couldn’t pass the credit check. I’m considering dropping my girlfriends down to the minimum £20 a month. She then uses my current iPhone one on iPhone 35 and I get the new 3GS one on iPhone 45. Then when my iPhone contract expires cancel that and up my girlfriends to iPhone 35. Thinking about it that may then set both contracts up nicely to expire every other year when a new device comes out which would be pretty good.
Alternatively, I may just hang fire, see if O2 lose their exclusivity and then take all my contracts over to orange.
Actually, my strategy is to have a weekend in Rome, buy half a dozen factory unlocked 3GS’s for around £480 keep two for us an sell the others on eBay along with my two 3Gs.
Should at least cover handset costs and maybe make a profit, and will no longer be locked to O2.
Yep that works
I think I might just buy myself a compass and staple it to my iPhone. Would be a hell of a lot cheaper
now thats where ur wrong…..if you sign an 18 month contract for £30 a month whether you kept the contract or not you are still liable to pay till the end of the contract……always some one trying to scam money….if you didnt want a contract u shouldnt get one….they should ask for the amount of mins and txtes if they dont use em….you paid the rental in full if you choose to do that then thats your fault…and if you dont call to cancel your acc it will remain to continue its your responseability to keep a check on ur contract lengh and its not 2 running one is paid off and the upgrade is put through……………
Thanks for your comment, however, I’m not wrong and there’s a thread Here as well as a variety of discussions on a number of consumer sites should you be interested in learning the finer points of consumer law.
As for trying to scam money etc etc etc if you had read other posts on this blog, you’d have probably seen that I solved the iPhone 3GS upgrade dilemma 6 months ago by taking out a THIRD contract with O2 which meant I was paying them more money not trying to scam money out of them. I actually just today completed my original iPhone 3G contract and upgraded that one onto a 3GS as well for my other half.
Thanks again for your comment and can I suggest you try and get a grasp of what you are talking about, learn how to use the shift key, spell check and paragraphs before making yourself look even more stupid. Thanks!
I believe the charges one need to pay to buy out one’s contract are slightly unfair however they are at present legal and within ofcom guideline.
Suppose I buy a 18 month contract with o2 for 100 min, 500 text, at around £20/month
I cancel after 1 month.
O2 will not provide me 1700 minutes for next 17 months. But will charge in full. (about £340). However had I stayed with them they would have to pay for the cross network portion of the 1700 minutes, paper work for my bills etc. So it is fair if they pass a portion of these costs o the customer. 3 gives about 3% discount for new customers and 10% for old customers if one wants to buy out the contract. It is written in their contract. I have heard vodafone gives 25% (not sure, but read in more than 1 forum) discount plus if you take another contract with them they give you further discount. Plus if one buys a sim only contract it is very unfair if one need to pay off for the remaining months to buy out as there was no subsidied hand set.
O2 has uk based customer centre and their service is good, but their policy to keep customers in their network sucks.
Was with o2, wanted to upgrade, their upgrade deals are not good. Went outside (to dial a phone) for better deal. Dial a phone told the better deal was for new customers, not for old one. So cancelled and got a new contract.
Is that a good policy o2?