People in free-form battles get away with waaaay too much crap, no need to regurgitate that again in this topic. I was once fighting a mutant sausage that I'm pretty sure was borderline god modding. I can call him cheap because I won, but only because I was able to bait him into doing something reckless by going after his girlfriend. It was amusing, but rules would have made the experience that much better. I don't know how you balance a monk that fights with "sonic paint" and a sausage that can use attacks from every foe he's ever slain. And that sausage had done a LOT of dueling!

When I say "won at character creation", I'm not referring to the dice rolls. A sorcerer will naturally be at a disadvantage to a paladin because of the paladin's higher magic armor and the sorcerer's lower physical armor. Stat allocation and skill choice also play a bigger roll in more closely evened out duels. Basically, the winner is the one who prepared the right way, rather than made the best moves.

To help make things interesting, maybe giving both parties some gold to spend on weapons, armor, and utility items would be best.