The enchantment will stop working the moment a hostile creature/NPC is around and it will be replaced by a 'ward' type of effect which will cause a small, costant damage to nearby foes.
A major problem I noticed happens when potential threats are not full hostile but in "search mode" (eye half open): the muffle effect will be deactivated although the armor won't immediately activate the other protective spell. Most of the time, this premature disabling of the muffle effect will make my character plainly visible to nearby enemies because the penalties for sneaking in heavy armor will be back in full effect.
I believe this is an oversight in the design of the armor, not to mention that the 'cool' shadow is also quite annoying during combat or while using the bow to take long range shots. There's a MOD do disable the graphic effect but I don't think I've seen anying to fix the odd behavior of the armor which makes it much less useful than it appears at a first glance.
