You can hang back and let them fight each other for an easier win, but the AI will band together against the player if they wait too long. When around 10 contestants are left from your kill count in the top left corner, they all spawn in quick succession. Other than the fighters that spawn initially, combatants only spawn one at a time, giving the player a good chance. At the end of the fight, you will receive a certain amount of money, depending on how many opponents you knocked out.
The only aim is to survive and knock out as many opponents as possible. All contestants start with no armor and a randomly generated practice weapon which may include a sword and shield, two-handed sword, staff, or a bow and arrows. There aren't really any rules though, and there are no teams it is essentially just a brawl. If you talk to the Tournament Master, he can tell you the rules, as well as put you into a fight. Every town holds melee fights all day long, every day.