I'm going to go into detail about how combat will work. Once a fight is initiated the player's base damage is calculated by combining his strength, combat experience, weapon quality and armor quality. When attacking, the damage dealt to an enemy will be your base damage plus or minus ten. There's also a 5% chance that you will roll a critical hit (x3 damage) and a 5% chance you'll roll a fumble (0 damage dealt).
The player's hitpoints in a fight is the same as his HP statistic, so if you start a fight when your HP is low you'll be weaker and easier to kill. If you start a fight and realise the odds aren't in your favour you are allowed to surrender or attempt to flee at any time. Your chances of surrendering and being taken captive depend on the type of enemy you are facing, some enemies might decide to excecute you. Monsters are the most likely to execute you, followed by criminals, then common folk, then soldiers, and knights/paladins are the least likely to execute you because they have a code of honour. If you're winning a fight then enemies will be able to surrender or flee, and if you capture them you can choose to rob them, execute them or set them free for a big karma bonus.
So that sums up individual fights, but how will group fights work? Lets say you're a sailor and pirates board your vessel. While you're facing individual enemies, your sailor allies and the other pirates are fighting against each other as well. The more enemies your allies can kill, the less enemies you have to face by yourself.
Battles involve thousands of allies and enemies fighting at once. If you've just started the game, you're not a demigod superman like in most RPGs. This is a medieval fantasy life simulator so you're probably just another peasant with no combat experience at all. You're very unlikely to determine the outcome of a battle you're participating in, even if you're a harderned veteran or a knight you'll have minimal influence on the outcome of a large battle.
Everything I've written here is subject to change, but you'll get to test a lot of these features when I put in the first combat draft in 0.27 for feedback :)