The endurance test with the goblin anal scene doesn't seem to be working, it's listing the tested attribute as 0. This means that you fail every check.
Viewing post in Known Issues (and bug reports)
As your health is lowered, your endurance lowers as well - since the only way to see that scene currently is to get to 0 HP against the Goblin, most characters will have 0 END during it. In the current build the checks are 3-2-1, meaning high END characters like Paladins will be able to succeed at them.
That would explain why there doesn't seem to be a way to recover once your health gets low. Healing spells, taking defensive stances, trying to wear your opponent out, none of it seems to work after you've lost a certain amount of health. Combined with armor sundering, it seems that once you start to lose a battle in this game, you've lost the whole thing.
EDIT: BTW, did you change it so that the paladin is even able to get into the fight with the goblin with their base stats? Last I checked, you'd always get hit on the head and then have nothing happen.
Healing spells and items are still just as effective at low health - Magic is unaffected by low health, and similarly so are items.
If a Paladin doesn't increase their perception or Agility, they will be bopped on the head by the Goblin, but their high endurance will mean they're left unfazed. Mages and Enchantresses with unmodified agility and Perception will be knocked out.