The popular image of cyberspace as a futuristic version of the lawless wild west, where anything goes, can be dangerously misleading, as Demon Internet has just found out to its considerable cost.At the end of last month, the Internet service provider (ISP) agreed to pay £15,000 damages, plus £230,000 costs, to the enigmatic nuclear physicist Laurence Godfrey.

The out-of-court settlement seems to have served as a wake-up call for those on-line providers running bulletin boards or discussion groups.

Within days, a number of Web sites -- including those of the gay Internet magazine Outcast and former Law Society Vice-President Kamlesh Bahl -- which were reported to have contained allegedly defamatory comments, were shut down by nervous ISPs.Cyber-libel claims have been few and far between in the short life of the Internet, and the Demon case would have been the first major contested Internet libel trial had it made it to the High Court.

According to David Hooper, a senior defamation partner at City firm Biddle, the claimant had earned himself a reputation as the 'Don Quixote of cyberspace' for his have-a-go approach in the libel courts.

So far, he has issued writs against Cornell University, New Zealand Telecom, the on-line Toronto Star, and the Melbourne PC users group, as well as two individuals.Demon had argued that there was no active duty to remove a defamatory posting, and claimed it was protected under the innocent dissemin ation defence under s 1 of the Defamation Act 1996.

The defence is available where an ISP had taken reasonable care and was either unaware or did not have reasonable cause to believe its involvement led to a defamation.

In a landmark ruling last March in the first hearing of the Demon case, Mr Justice Morland said that such an argument was 'in law, hopeless'.However, an unbowed Demon pledged to fight on.

'Demon Internet continues its campaign in the interests of the Internet users to ensure freedom of speech', ran a press release at the time.

In reality, it was a bad case for Demon to have fought, says Mr Hooper.

The facts were not helpful, as there was little effort by Demon to remove the offending comments, despite repeated requests by the claimant.

Nearly a year later, and almost at the courtroom door, Demon delivered a full apology.So where does Demon's climb down leave the Internet industry? It will have a 'chilling effect' in the UK upon free speech on the Internet, predicts Adam Taylor, an IT partner at City firm Withers.

'This casts ISPs into the role of unwilling policemen,' he says.

After this settlement, they will pull bulletin board postings in response to the 'slightest objection', and that 'cannot be good for freedom of speech', he reckons.Of course, there is another way of looking at the situation.

Nick Braithwaite, the partner at civil liberties firm Bindman & Partners who represented Dr Godfrey, calls it a 'David and Goliath' case.

And one that Goliath could never hope to win, he adds.

The case has established a precedent that ISPs can be publishers, he insists, and the scale of the damages demonstrates 'the capacity of the Internet to blight a person's reputation'.Speaking after the settlement, his client told the press: 'If Demon had taken the simple steps I had asked of them at the outset, this monumental waste of money could have been avoided.

Demon have established a precedent which they claim has adversely affected the ISP industry.

All they have to show for their efforts is a bill for about half a million pounds, defeat at the hands of a physicist with limited resources, and a large dose of humble pie.'It leaves ISPs in an invidious position.

'They're going to have to take things off [the Web site] when there is a complaint.

How are they going to judge the strength or otherwise of the complaint?' questions Mr Hooper.Tom Crone, legal manager of News Group Newspapers, says his company is currently addressing its systems to the potential threat.

But policing the Internet is not easy.

'Service providers don't know what is out there,' he explains.

'In large organisations, if the message is not delivered correctly, it does not necessarily get to the person who can do something about it'.Mr Crone draws an analogy between the responsibilities of an ISP and an 'independent' printer.

'There are libels inside the magazine, and the printers tend not to be sued, but occasionally they are,' he says.

'And the law allows them to be sued.'Justin Walford, head of legal at Express Newspapers, says that a 'swift lawyer's letter' will leave those who run sites in a 'terrible dilemma' as to whether to remove offending items.

There needs to be a debate about the role of the Internet, he argues, and in particular about the innocent dissemination defence.

'One has to accept that even in the relatively short period of time since the Act, there has been a total transformation in our understanding of how the Internet is going to change our lives,' he says.Clare Gilbert, Europe general counsel at the ISP AOL, says the f irm will not comment on the Demon settlement, other than to say both as an ISP and as a key member of the Internet Service Providers' Association, that the development raises concerns about the adequacy of UK legislation.

The Defamation Act 'purports' to give a defence to network providers, she says, but 'then makes the defence disappear' as soon as the provider receives notice of infringing content, despite the ISP having no effective control over its content.It is a view with which Jeremy Clarke-Williams, head of defamation at London-based Russell Jones & Walker, has little sympathy.

The ISPs are profitable organisations, he argues, and it is neither proper nor fair for them to duck these responsibilities.

The only people who have anything to fear are those who want to put defamatory material on the Internet.

'The balance between freedom of speech and the responsibility not to publish defamatory allegations still has to be struck.' He recently claimed ISPs would need 24-hour access to legal advice as part of new risk management procedures (see [2000] Gazette, 6 April, 5).Ian De Freitas, a partner at Paisner & Co who advises the Financial Times Web site FT.com, foresees hoax libels as being one problem for ISPs in the wake of the Demon result.

Someone could set up an anonymous e-mail account, post a libel on a bulletin board, and complain via a different e-mail account.

He argues that ISPs allow anonymous access and, consequently, they must recognise that they are laying themselves open to claims.

The question is to what extent do they want to take ownership of the problems themselves, he says.Whereas the policy-makers of Europe might look upon the Internet as a threat, in the US, freedom of speech in cyberspace is invoked as a First Amendment right.

Indeed, the Communications and Decency Act 1995 was enacted to protect providers who have taken 'good faith steps to restrict access or availability of material that may be obscene, lewd or violent'.

'In the US, they appear to look at the ISPs like a telephone company,'David Hooper says.

'You don't sue BT when somebody says something libellous down the telephone line.'The point was tested in an extreme example when AOL was put in the dock after the journalist who first broke the Monica Lewinsky story, Matt Drudge, alleged falsely in his on-line gossip column The Drudge Report, that a White House aide was a wife beater.

AOL, which paid the journalist a retainer, was still not held accountable.

The journalist once made the dubious boast to Time magazine that his column was '80% accurate'.The Internet is the perfect habitat for the determined libeller.

Adam Taylor cites the recent example of a UK Web site which was shut down after criticising members of the judiciary.

Straightaway, the site operator put the material on a US-based Web server.

Ultimately, he observes, legal attempts to suppress free speech on the Internet might well be futile.