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.