Contract : Termination and penalties

A customer can terminate a telecom contract in one of two ways: without liability or with liability. Most contracts are terminated without liability.

Termination without liability

There are three ways to terminate a contract without liability.

Fulfilling the volume commitment early
At times, customers can switch carriers before their term commitment is up if they have fulfilled their volume commitment. Some customers in this situation have left a token phone line with the old carrier so they can still fulfill the term commitment. A customer who signs a 12-month, $120,000 contract with AT&T may be able to switch to Sprint in the eighth month if it has already paid more than $120,000 to AT&T.

The carrier’s failure
Sometimes carriers fail to provide the contracted services. For example, a business whose dedicated private lines experience repeated down time may be able to cancel a carrier contract, especially if the contract contains a quality assurance clause. Customers who experience repeated billing errors may also be able to get out of a contract. Contracts never specify that the carrier is required to provide an accurate phone bill, but if a customer experiences many months of fouled-up phone bills, the carrier might let the customer out of the contract.

Out with the old
The simplest way to get out of a telecom contract is to replace it with a new contract. Of course, this can only be done with the same carrier and is normally only done toward the end of the existing term. But telecom contracts can be renegotiated at any time as long as the customer has leverage. A customer who is ordering additional services and is therefore increasing his volume is a prime candidate for renegotiating his contract. The following contract excerpt illustrates how an old contract can be replaced by a newer one:

Customers may discontinue their Simply Better Pricing Option Term Plan prior to the expiration of its term without liability if they concurrently replace service under the plan with a newly subscribed AT&T plan that has a specified revenue commitment equal to or greater than the remaining revenue commitment under the plan being discontinued (AT&T Business Service Simply Better Pricing Option Term Plan Agreement).

AT&T is essentially telling the customer, “We’ll give you a new contract, as long as we get more money or time out of you.” If the customer gets better rates, it is a win-win situation. Before renegotiating, the carrier will consider the contract value of the customer. Contract value is a way carriers look at a customer’s current contract and determine the financial value of that customer.

Termination with liability

The AT&T Simply Better Pricing Option Term Plan contract explains how a termination with liability is handled:

Customers who terminate their Simply Better Pricing Option Term Plan prior to the expiration of the selected term period will be billed a termination charge equal to the monthly revenue commitment multiplied by the number of months remaining in the term period (AT&T Business Service Simply Better Pricing Option Term Plan Agreement).

Here, AT&T tells customers they can cancel the contract, but it’s going to cost them. The customer must pay AT&T the remaining amount of the volume commitment, which happens to be the same amount of money AT&T would have earned from this customer anyway. If, however, the volume commitment is expressed in gross dollars, the customer pays more in a shortfall situation, because the shortfall amount is usually not discounted