The problem is with the British legal system, which makes defending against libel suits difficult. Essentially, the defendant has to prove his or her innocence, typically by proving the truth of every challenged statement (and there are other systemic flaws as well). In such a system, putting up a defense is such a hassle - and so expensive - that settling out of court is almost always easier.
The Laurence Godfrey case was settled out of court, setting not a precedent but a bad example. Most libel cases do settle. After Godfrey's victory, now even more will.
One of the better-known cases which went all the way to the verdict was the McLibel trial, in which everyone's favorite multinational food chain sued two unemployed activists for handing out a pamphlet. Attempting to prove the truth of every single statement in the brief factsheet took the vegetarians two years. They could not afford to pay legal counsel or even to buy the transcripts of their own trial's proceedings. They lost, but the negative publicity was a Pyrrhic victory for McDonald's.
And in very recent news, the big story has been one in which a Holocaust-denier brought suit for a book which (essentially) called him a Holocaust-denier. This time, the good guys won, but only because the author and publisher were willing to spend two million pounds to illustrate that the facts were on their side. The bookstores that were sued had settled quickly out of court and agreed to the plaintiff's terms. (If you follow this case, some excellent and very detailed legal analysis can be found at a site I happen to Webmaster, in the essays Irving'sWar.)
Even if a libel suit is only hinted-at, as in the Outcast and CACIB cases, pre-emptively removing the material is the publisher's safest move. Don't like what someone says? Afraid of what they might say? Gag'em!
The U.K. needs to wise up and bring its libel law into the 20th century, or its citizens will quickly find themselves inhabiting a Bland Speech Zone. An island on the Internet, if you will, where nobody dares say anything about anyone else - or if they do, they prudently take their speech (and their money) offshore.
As a Demon settlement news report predicted two weeks ago:
"If the ISPs become more cautious over what material they allow to be published - by screening submissions or suspending Web sites - they could inflame the debate over freedom of expression or damage internet-based businesses."
Neither of which, surely, will benefit the people of the U.K.
Update: 04/18 03:21 by J : Two good commentaries today from lawyers relating to the Holocaust-denier's lawsuit. The legal team defending against the Holocaust-denier's lawsuit has an interesting contrary view in today's Independent. They argue that British libel law works, and is getting better in response to criticism. But when they write:
"...libel actions and the associated costs are part of the process of publishing. They are to the publishing industry what construction disputes are to the building industry. If the litigation is expensive that is a criticism of the price of litigation - not of libel litigation specifically."
they obscure an important point. We are all publishers in the internet age. If publishing is to be restricted to those who can afford "industry" insurance policies against million-pound legal fees, put a fork in the U.K.'s internet - it's done.
And, see also a legal viewpoint from the defending publisher's lawyers.