The big cellular rip-off

Johannesburg, 12 May 2008

Cellphone providers force customers to ride out contracts, because of exorbitant cancellation penalties and full contract payout. However, experts say demanding subscription charges, to the end of the contract term, should be considered legally unreasonable.

This is what ITWeb discovered during an investigation into the costs of bowing out of agreements with mobile service providers.

After a tip from a reader, who was asked to pay nearly R10 000 to be released from an Altech Autopage Vodacom contract, ITWeb contacted the call centres of MTN, Cell C, Vodacom, Virgin Mobile, Nashua Mobile and Altech Autopage Cellular, using the names and details of real subscribers. We also contacted these companies' spokesmen for further explanation on cancellation charges.

The investigation found Altech Autopage Cellular's contract to be the most expensive to exit. At least two customers were quoted almost R10 000 to cancel contracts with just over a year left on subscription. It would cost one customer R9 976.88 to exit a Vodacom Talk 130 contract that had 14 months outstanding.

Autopage would not comment on the matter and could not provide a breakdown of the costs involved in either subscriber's situation. However, the total figure in both cases amounts to almost double the amount the subscriber would pay if they took the contract to term.

Pay for the phone

MTN admits the costs of bowing out are prohibitive. According to the company's media relations senior manager, Ntombi Mhangwani, the worst case scenario for a customer with an MTN MyCall 100 with 13 months outstanding would be a payment of R3 478 to settle the account.

She says the fee is made up of R136 per month subscription fee, as well as the R1 750 handset cost. In some instances, the service provider (SP) may downgrade the line, but not disconnect it and the SP will ride out the rest of the contract, she says.

However, handset costs should be covered in the monthly subscription fees, and the actual costs are not transparent. According to Mhangwani, "MTN will claw back the full connection incentive from the service provider" in the event of a contact cancellation.

Both Cell C and Nashua Mobile say they charge around R1 000 penalty fee in addition to the remaining months' subscriber fee on a cellphone contract. "Nashua Mobile's terms and conditions state that when a customer (for whatever reason, and either with or without the consent of Nashua Mobile) wishes to terminate an agreement before the expiry of the agreed period, Nashua Mobile is entitled to claim immediate settlement of all outstanding amounts payable in respect of the agreement," says the company.

Not entitled

<B>Legal considerations</B>

Kerron Edmunson explains several legal aspects of the industry.
1. ICASA's mandate. ICASA has indicated in consultations and statements that it considers the practice of long-term contracts to require intervention on behalf of consumers. However, it has not obliged operators to stop requiring customers to enter into long-term contracts (up to 24 months) and so many operators continue to require customers to sign up to these contracts.
2. Read before you sign. Since a customer has entered into and therefore bound itself to the contract in the first place, one can have sympathy for the operators on the basis that one must be aware of what one signs.
3. What is reasonable? It would be "reasonable", in my view, to require customers to pay for the call charges plus a reasonable deposit based on average bills for a month, to cover likely expenses prior to porting. It would also be "reasonable" to require a customer to pay off the remaining amount of the actual cost of the handset in full. What is not reasonable, is to require payment of the remainder of the contract period's subscription charges, or even more than this, as is sometimes the case.
4. Common law on damages. Real losses are, therefore, no more than the historic amounts owed. Mitigating a loss would imply that the network operator find itself another customer - which happens all the time. The network is configured (at least in theory) for far more customers than are currently subscribers on the network - so the network operator has not lost money by configuring the network specifically for one customer. The only other loss is the cost of the handset, but this should be limited to actual cost - not cost plus interest or finance charges over the lifetime of the contract.

According to telecommunications attorney and consultant Kerron Edmunson, mobile providers are entitled to recuperate losses, including the amount owed on the handsets, and outstanding call charges, but not subscription costs.

"The fact that a customer signs a contract and agrees to be bound by an unfair term should not be supported in law when the operator, in this case, can be adequately compensated for the termination of the contract by payment of actual outstanding costs including the actual (but not inflated) cost of a phone," she says.

Edmunson notes that local common law requires parties to mitigate their losses and claims for damages, suggesting that operators should only claim that which is required to satisfy their loss.

She says anything over and above that, including the contract term subscription charges, amounts to a penalty, which is only imposed when an offence is committed. "The only offence that the customer has committed is wanting to move operators.

"The charges often imposed by operators on customers wishing to cancel their contract in order to port their numbers can be regarded as punitive, and in many cases could be challenged on the basis that they do not reflect actual damages or losses suffered by the network operator and nor do they suggest that operators have attempted to mitigate their actual loss."

However, she says there is hope yet in the form the new Consumer Protection Bill, which has recently been published again for comment.

"In this Bill, long-term contracts will be dealt with harshly, and the Bill establishes the consumer's right to cancel a fixed-term agreement, limits the rights of suppliers to impose cancellation charges, and sets out rules governing the expiring of such agreements."

Terms and conditions

Vodacom spokesman Dot Field notes that each service provider has different contract obligations, which will be applicable with the cancellation of a cellular contract.

The cost of the mobile phone provided to the customer as part of the tariff package, is based on the expected revenue generation over a 24-month period, she says. For this reason, when a contract is cancelled prematurely, there is a cost implication, she adds.

Field also argues that "a cellular contract is the same as any other contract a customer enters into, with specific contractual obligations that are required to be fulfilled".

The terms and conditions of cellphone contacts are explained to a customer at the point of sale, she concludes.