When the fight with the drunk villagers starts my sword was instantly out, I left clicked before I could attempt to put it away and have a brawl. So my character got 1 swing off. I then went to hit 1 to put my sword away but may have mashed the ~ key as well. Then the fight was over, game goes to a cutscene where I'm cutting some guy's head off.

Was the fight supposed to be instantaneous like that? Or did something goof up? I also the got the Butcher of Blaviken from it.

Goofed up I think. It was a fist fight for me.

As for putting the sword away that is the "C" key.