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How Does a Cell Phone Contract Work?

A man talking on the phone, trying to get out of his cell phone contract.


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Cell phones are everywhere these days, and each person that uses a cell phone has some version of a cell phone contract. These mini-computers are complex — but understanding how your contract works doesn’t have to be. Check out the following information on what a contract is, what you can expect in your phone contract, and what to know about terminating a contract early.

What Is a Contract?

It may help to break down what a contract is in the first place. Without getting into the legal details, the most common type of contract is where one party agrees to pay another for a good or service. Contracts can also be called “agreements,” “plans,” or other names.

Once you sign a contract, it’s hard to get out of it. It is well-established in contract law that breaking a contract early leads to penalties. Nobody wants to read lengthy terms and conditions, but always try to read a contract fully before signing.

Federal law regulates the telecommunications industry generally, but specific laws governing contracts with cell phone companies are in the states’ hands.

Two Types of Cell Phone Contracts

Did you know when you purchase a cell phone and set up service, you may be entering into two contracts? The first is your agreement to purchase a phone and make installment payments until it’s paid off. The second is your cell phone plan, also known as a “customer service agreement.” Among other details, this contract spells out:

  • Which data, voice, text, and related capabilities you’ll have
  • How much and when you’ll pay
  • How you’ll resolve disputes with your carrier

It may help to think of cell service contracts in terms of either “prepaid” or “postpaid.” Prepaid means you pay in advance for a set amount of calling, texting, or data usage, and you aren’t locked into a long contract. Postpaid plans usually require you to sign a contract for a length of time, the most common being two or three years, in which you pay a monthly fee for service.

Common Parts of Cell Phone Contracts

Phone service contracts are generally one-size-fits-all (known legally as ‘adhesion contracts’), but some negotiation may be possible. It’s always worth asking whether your carrier will price–match or throw in extras to keep you as a customer.

Your contract may also incorporate additional documents. For example, the Verizon customer service agreement refers to separate service terms and conditions. By signing your contract, you are agreeing to the terms and conditions, even if they are in a separate document. Don’t worry — providers are required to make every part of your contract accessible to you.

Common terms of a mobile phone service contract include the following:

Length of Contract

Your provider should clearly state how long the contract lasts. Signing a 36-month contract? If you have plans to move out of the country in a year, or you like to upgrade your phone quite often, that length of time may not work for you. Know what you’re getting into before you sign.

Dispute Resolution

Many contracts include forced arbitration clauses, meaning you agree to settle disputes with the provider through a neutral third party, or arbitrator, rather than in a lawsuit. These clauses may allow you to file a claim in small claims court, but you won’t have a lawyer or a jury.

Early Termination Fees

Most contracts require you to pay early termination fees (ETFs) if you cancel your service before the length of the contract has run. ETFs can be hundreds of dollars.

Some carriers may prorate ETFs based on the amount of time remaining. In other words, your ETF may be higher if you cancel with 10 months remaining on your contract than if you cancel with 4 months remaining. Note that if you switch providers, some may offer to pay your ETFs from your old provider to lure you to their service.

Ways to Avoid a Cell Phone Contract

With a month-to-month plan, you decide on a monthly basis whether you want to continue with your current cell provider or switch carriers. You won’t be tied to a long contract but will have to agree to other terms and conditions of using your provider’s cell service. However, if you purchase a phone and agree to pay it off in installments, you would need to enter into a contract for the phone purchase.

“Pay-as-you-go” plans, or prepaid plans, require no contract because you make a one-time payment for a set amount of service to use. A contract may be required for postpaid pay-as-you-go, because you would agree in advance to rates and other conditions.

Terminating a Cell Phone Contract Without Paying a Fee

If you’re not impressed with your cell service or think you’re paying too much, you might be wondering how to switch cell phone carriers without paying an ETF. Consider these strategies for ending a contract.

  • You cancel within 30 days. Some companies allow you to cancel without a penalty within a month or similar length of time
  • Your provider changes your contract. A party to a contract can’t change the terms without the other party’s consent, which means you can reject the change and terminate the contract if your provider starts charging you more than your contract states
  • You no longer live in the coverage area. If you move to a place where your carrier does not provide service, they may let you out of the contract
  • Someone takes over the remaining contract. Most large service providers allow for transfer of billing responsibility, meaning someone else takes over the payments on your contract
  • The military gives you orders to relocate. If you’re on active duty, you may be able to terminate your contract, provided you signed the contract before you knew you were going to relocate (taxes and other unpaid fees may be due, but providers cannot assess ETFs in this situation)
  • You die. This may go without saying, but, if you die, you’re off the hook for the rest of your contract, though someone will have to close your account (creditors may seek to recoup unpaid charges or a remaining balance from your estate)

Another suggestion: It never hurts to simply ask. Speak to a customer service representative and be polite, but firm. Tell them why you’re having problems with your service. Ask to speak to a higher-level employee if your current agent says no or doesn’t have the authority to cancel your contract for free.

Trying to Get Out of a Cell Phone Contract?

If you are wondering how to get out of a phone contract, it may be a good idea to seek the advice of a business attorney who can review your contract and advise you on next steps.


This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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