It's normal in the UK that any change such as a phone upgrade restarts your minimum contract term from the start (one trick they like to pull is offer you a 'cheaper tariff for free' or 'free friends and family calls' or similar, then silently drop you on an 18 month new contract without pointing that out.. because it's still not so widely known that it's universal practice to restart contracts in this way).
Anyway, from the pay monthly T&C for iphone (
http://www.o2.co.uk/termsconditions/tariffsandboltons0153) clause 2 in 'General':
"If you end your contract during the 18 month minimum term, you may be required to pay the applicable monthly charge for your tariff until the end of the minimum term. This will not apply if your purchase a new iPhone from us, in which case you agree that a new 18 month minimum term will apply."
Which is, as I read it, the standard ability to buy your way out of the contract early, with an extra exception to allow you to upgrade an iphone within 18 months - but restarting the 18 month minimum period.
As this is what is in the contract you agree to I'd believe that rather than a customer service person.