If the player or NPC holds a shield they block. If either wear armor it protects you. It just fortifies those skills and your attack by 300.

Recommended Mods:
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Morrowind Code Patch (Skill and Stat Cap Remover)

My Mods:
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Dynamic Morrowind - Towns: http://www.nexusmods.com/morrowind/mods/43147/?
Beast Race Passive Ability Fix: http://www.nexusmods.com/morrowind/mods/43159/?
Dynamic Morrowind Sound Addon: http://www.nexusmods.com/morrowind/mods/43158/?