The basic laws and punishments of Sanctuary are currently in the module, which should be up again hopefully sometime this weekend. At the moment we're working on stabilizing our major systems and converting our quests to our Quest System.
You've asked a lot of specific questions, some of which may best be determined IC, but here's a brief response to some of them:
The IC legal code of our town does not allow for the unsupervised execution of drow on sight in the streets. Putting aside that drow traders/mercenaries/good-aligned or neutral drow do exist, such an act would be considered unwise. Killing drow may attract the attention of Traensyr, and "willfully endangering Sanctuary" is actually the most serious crime in our struggling settlement. On the other hand, drow are feared and hated with an intensity by many citizens of the town. A drow walking undisguised in Upper Sanctuary (the more lawful district) would probably be brought in for questioning and ejected. Helmed drows skulking about in the shadowy corners of Lower Sanctuary, a distinctly more chaotic area, would be unlikely to be harassed by NPCs.
OOC, a perfectly possible and good concept is that of a PC that hates drow so much that he seeks to hunt out any he can find and murder them all.
If PCs want to change the laws to say that Drow are to be killed on sight, that is certainly perfectly possible. If a PC wants to establish a secret brotherhood to annhilate as many drow as he can, that is also perfectly possible.
The legal system, as it is, is not utopian. It is subjective, and very much bound to the whim of the Council -- at this moment, made up of NPCs. Generally punishments are determined by an individual Councilmember, and if there's a disagreement with the proposed punishment then it is resolved by a vote.
The Council is presently entirely NPCs, but soon as we go live we'll start having elections (monthly? every two months? I forget what we decided). You do not have to apply OOC to join the Council, everything is handled IG. Council can change any law, including laws that govern the Council. Councilmembers can lose their post. Being "presumed dead" (i.e. not playing for a while) is one easy way to lose your post, Councilmembers should definitely be active players.