I've played freedform RPGing with intense social interaction. What made it different from the case I described, and what
@Lanefan,
@Bedrockgames and (as I understand it) you are describing, are two things:
(1) The social interaction was
between the players, each of whom had a character to play;
(2) The role of the referee was to move from player (or group of players) to player (or other group) and to whisper, cajole, interject etc so as to help bring it about that everyone was playing his/her PC to the hilt;
(3) The situation at hand demanded that a consensus or final resolution be reached, so that in some ways (of course not all) it was analogous to a game like Diplomacy. Once that position had fallen out of the interpersonal interaction, the referee did not try again to destabilise it. Rather, he narrated its consequences.
This is very different from the GM logically extrapolating how a NPC will respond to a player's advance on behalf of his/her PC.
EDIT having just seen this post:
The scenario I described above was in the neighbourhood of your PvP variant. It worked for the reasons I've described, which take it well outside the territory of "GM decides".