Do you know what a conditional statement is?
Where they have something like this for tageting:
if(target.isEnemy)
{
//Attack code goes here.
}
else
{
//Friendly code goes here.
}
They change it to:
if(target.isEnemy || (area.isFriendlyHostile && target.isFriend))
{
//Attack code goes here.
}
else
{
//Friendly code goes here.
}
That is pseudo-code and is likely nothing like the logic or object properties in the actual game code, but the point is they may very well simply be able to change some conditions of behavior in some action code.
I would also bet that alignment is still in the engine and is the mechanism by which they determine friend or enemy. They simply hid it from the player as they turned it into a two value boolean friend/enemy, versus degrees of alignment. Or the degrees of alignment are there still and affect under the hood aspects we don't realize.
On to the lore of Istaria. Who cares? A set of races united against a common foe? Sure, they can all be united against a common foe, but still be at each others throats or trying to profit or gain power in ways that others would not like...but all for the common goal of defeating the foe of all people of the planet. Many unscrupulous people do things for the common good that not all those commoners would agree with (*cough* Bush *cough*).