By Bernd Debusmann

WASHINGTON (Reuters) - An unprecedented lawsuit stemming from the gruesome killing of four American civilians in Iraq is slowly making its way through the U.S. legal system, closely watched by companies estimated to field up to 100,000 contractors alongside the U.S. military.

Lawyers and military experts say the case highlights legal grey zones, a lack of regulation and little oversight of a booming global industry believed to bring in more than $150 billion annually. Civilian military contractors now perform scores of functions once restricted to regular troops, and a trend towards "privatizing war" has been accelerating steadily.

The suit was brought by the families of four civilian contractors shot last year by Iraqi insurgents, who burnt their bodies and hung the charred remains from a bridge across the Euphrates river in the city of Falluja.

The four -- Stephen Helveston, Mike Teague, Jerko Zovko and Wesley Batalona -- worked for Blackwater Security Consulting LLC, one of the companies fielding armed civilians in Iraq under contract with the Pentagon. All four had military experience and signed contracts assuming all risks and waiving their right to sue.

The suit against Blackwater says the company broke explicit terms of its contract with the men by sending them to escort a food convoy in unarmoured cars, without heavy machine guns, proper briefings, advance notice or pre-mission reconnaissance, in teams that were understaffed and lacked even a map.

"Sending four men out on the security mission instead of the required six essentially took away the team's ability to defend itself," the suit says. "Not having one driver, one navigator and a rear-gunner with a 180 degree field of fire, the team never had a chance...the insurgents were literally able to walk up behind the vehicles and open fire upon them at close range."

Alleging wrongful death and fraud, the suit is the first of its kind in the U.S. The way it is resolved, experts say, could have major implications for the future of military contracting and result in more rules and regulations.

Blackwater, which declines comment on the suit, filed motions this week to have the case moved to a federal court from a state court in North Carolina where it originated in January. Blackwater's headquarters are in Moycock, North Carolina.

Marc Miles, an attorney for the families, said he expected the suit to come to trial next year.

WILD WEST



"This is an important case," said Jeffrey Addicott, director of the Centre for Terrorism Law at St. Mary's University in San Antonio. "While the volume of contractors pouring into Iraq has been enormous, there has been very little effort at regulation or standardizing training. It's the Wild West out there."

Addicott, a retired Special Forces officer, estimates that the number of civilian contractors in Iraq surpassed 100,000 this year. "That takes into account not only people specifically hired to provide armed security, but also those in transportation, construction, food services, housing, laundry etc. Americans and non-Americans."

Other experts agree with that estimate.

Despite the large sums of money and large numbers of civilians paid by the Department of Defence, the Pentagon does not have a precise tally of either. The estimate of contractors it gives - around 20,000 - dates back to a remark by Defence Secretary Donald Rumsfeld almost two years ago.

Such estimates cover what is known as "arms-bearing contractors" who work for firms including Blackwater, Triple Canopy, Aegis Defence Services and Military Professional Resources Incorporated (MPRI) - all run by retired military officers.

There are about 173,000 U.S. and allied troops now in Iraq, led by the United States with 155,000.

ARMY DEPENDS ON CIVILIAN CONTRACTORS

U.S. armed forces can no longer function without civilian contractors, neither in combat nor in the post-combat stability and reconstruction operations that the Pentagon last month declared a "core mission," experts say.

According to Peter Singer of Washington's Brookings Institution, private companies that sell warfare-linked services to governments represent "the corporate evolution of the age-old profession of mercenaries."

The firms involved bristle at the term "mercenary," which evokes images of white guns-for-hire working for African dictators and staging coups and countercoups on behalf of the highest bidder.

Civilian contractors say they provide protection and support personnel rather than war fighters, but the line is often thin. Some of the most advanced weapons systems used in combat in Afghanistan and Iraq were manned by civilians.

But while "mercenary" has been replaced by "private military firms" or "private military companies" - PMFs or PMCs -- there is no doubt that the driving force is money.

PMFs have operated in more than 100 countries. In 1990, revenues from their activities were estimated at around $55 billion, a sum thought to have tripled by this year.

OUTSOURCING

The government's rationale for outsourcing military services is that it saves cost and increases flexibility - similar to corporations which cut their work forces then outsource functions to contractors working without health or pension benefits.

There are no recent studies, however, on the long-term cost benefit of replacing regular troops with contractors.

The downsizing of the U.S. armed forces has been substantial and relentless - from 2.1 million when the Berlin Wall came down in 1989 and the Cold War ended to 1.4 million today. More cuts are under consideration.

One tricky consequence is the free-market competition between the military and the private sector for people who have been trained - often at considerable cost - by the military. PMFs pay up to 10 times more than the military for very similar functions.

Special Forces expertise is in particular demand, and operators can make more than $200,000 a year, a good part of it not subject to U.S. income taxes.

To counter the lure of private contractors, the army has begun to offer re-enlistment bonuses of $150,000 for special forces soldiers who agree to stay on an additional six years.