Uhm. If an ISP has a policy catch-all clause of "We can disconnect customers at will, without reason" then you get what you deserve, responsibility for your actions.
After a few big money costing lawsuits over this, I hope ISP's will return to their common-carrier status. I have no hopes that they will do so from a moral or ethical point of viwe, but let's hope they do so from a commercial point of view.
If as an ISP, you don't want to get involved, it is very simple - Only take action based on court decisions (or in the case of the US, also DMCA requests and DMCA notice expirations) - If a third party wants any information/decision against a customer, make them indemnify you for any consequences their legal action will have on you, the ISP.
This way, you're out of the loop, let the parties fight each other in court, and do whatever the judge tells you to do, without the risk of getting sued by one of the parties involved for your (in)actions.
With policies like that, you can host things like say, http://xenu.net/ without getting sued by even such trigger happy people as Scientology O:)
This has been a discussion item in the Swedish ISP business for quite some time (for a reason). The matter is actually a lot more complex than what you say above. First of all, in my opinion (and this seems to be pretty common), a company should be free to choose who they sign contracts and business deals with. In principle, if I believe that a potential customer will end up in financial trouble, if I believe that having him as a client will harm other business relations (out of competitive claims etc) or similar issues, I should be in my full right to deny signing a contract. At the same time, I as an ISP do not want to categorically based on content, ethics, morals etc deny customers or disconnect customers. Especially for content that is judged illegal. If content is illegal that is up to the courts and police to judge and take action on. Now, getting these two claims to work together is the tricky balance. - kurtis -