They may not talk to each other, but the AI doesn't break Alliances just for fun. I didn't play M2TW Mods very much (compare to EB) but tested a number of factions several hours each in Third Age and Speer & Schwert and it's way better as far as I can tell.
You can see how much a faction likes you, how likely it is that the AI accepts your offers and how trustworthy a faction is. I never saw an allied faction attacking me, even not neutral factions that like me a lot. It actually seemed quite passive for a player like me that is used to super-aggressive AIs of RTW or EB, but the AI behavior was quite reasonable and relative realistic.
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