This does two things. First, it starts combat between two NPCs under very specific circumstances. Second, it gives one of the NPCs checks to do certain things in that combat.
There is a different version of this script that was released with Morrowind. My contribution here was to add the combat program for the NPC. You'll notice that for various reasons in the NPC vs NPC combat Vorar Helas will do two things. One, he will drink a skooma potion. Two, he will cast a spell.