Early termination fees for fixed term contracts

The TIO receives complaints about the validity of termination fees charged for early release from fixed term contracts. In some cases, customers are charged a fixed termination fee even though their contract has almost expired.

Early termination fees can be charged for all types of service contracts, most commonly for mobile telephone and Internet services, but also for landline services.

Before formation of the contract

The TIO takes the view that suppliers must make it clear when giving point of sale advice and in the contract that a fee will apply if the contract is terminated early. The supplier should also make it clear how much the fee will be and how it is calculated. If the fee is made up of different components, each of these components should be disclosed.

The TIO will consider complaints about the absence or adequacy of such information.

Fee or penalty

By law, an early termination fee should not be a penalty imposed on the customer. The TIO takes the view that a fee that exceeds a genuine pre estimate of a company’s loss is a penalty.

The TIO will investigate complaints where it believes an early termination fee may be a penalty. In investigating such complaints the TIO may ask a provider to:

• explain how it calculated the fee in question; and/or
• quantify any losses it would incur as a result of the early cancellation*.

Fair and reasonable

In addition to legal considerations, as an alternative dispute resolution body, the TIO would also consider whether an early termination fee is fair and reasonable in all the circumstances.

Last updated: 12 April 2006

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