Well this is actually someone elses idea, but I can't find the post for the life of me ( I think it was a reply to something...).  Anyway, whoever you are, I liked your idea, and now it has it's own thread!!

Fight organised matches between the sovereigns.  Simple. Can fight each other for fun, or for gildar.  Fights are not to the death.  The magic healers of the fights keep you alive at 1 HP (so you don't have to spend half mana to not die).  Fights are duels wetween the sovereigns only.  The gildar should be crowd takings (not from the empire/kingdoms, however you could charge a fee for entering in the dual to setup the temporary arena etc).  The corwds could be bigger/more money, and the entrance fee cuold be bigger/more money, based on how high lvl the Sovs are, and how close in lvl the Sovs are (closer the better).

Actually, you could increase the scope of this to allow diplomacy decisions baesed off the outcomes.  But this would require a lot of work I think.