No you buy a PAYG, he phones O2 tells them he's got an iphone as a gift and wants to convert his current contract to the equivalent iphone one, at worse he would have to wait till his next billing cycle date, but I doubt that. He should confirm when the contract switch will occur and what his allowances will be prior to that happening. Pop his current contract SIM in the iphone and activate it. He is then careful if he has to wait for any data allowances to be activated.
He then thanks you and feels guilty all day about the crappy steam iron he bought you