In my home-brew labyrinth lord campaign I recently recast the classic D&D alignment system into an allegiance one. This is because the very ideas of law and chaos are nonsensical; who's law are you following, exactly, when you are lawful? One man's freedom fighter is another's terrorist, and so on. It just doesn't work on an individual level, probably because it wasn't really intended to.
Law and chaos seem to be being used in the old school community to represent the grand ideas of two philosophically opposed sides. This is because the origin of D&D's alignment system is in wargaming (i.e. Chainmail). There, having a reason why two units will (or won't) exist in the same army, makes a lot of sense, but when applied to roleplaying, makes little sense.
It's probably why AD&D uses a 9 segment alignment system, adding good and evil into the mix and calling 'neutral neutral'true neutral. This is clearly intended to add some complexity to an overly simplistic system that was being used to represent morality ('a lawful character wouldn't do that!').
I think that recasting law and chaos in the frame of Light and Dark solves a lot of the inherent problems with the labels of law and chaos. Humans, elves, dwarves, giants and so on make up the contingent of the Light, while orcs, goblins, trolls and such make up the Dark. Light races cooperate with each other and may even war with each other, but put their feuds aside when threatened with the Dark. The same applies to those who's allegiance is to the Dark. There are members of each species who are traitorous and are allied with the other side, working from within to bring about its downfall.
The Light and the Dark are not just diametrically opposed, those allied with either have a moral responsibility to rid the world of the other side, which is working equally hard to do the same to them. There is no to be no quarter given, no bargaining done, unless it is a trick. Each side is striving to utterly annihilate the other. It is said that on doomsday, the issue will be decided once and for all, with each side having its own prophecy stating it is they who will emerge victorious. Each side inspires fanatical devotion and neither are above poison, forbidden sorceries, raising the dead and breaking any 'rules' to achieve victory. Both believe the end justifies the means.
Amidst these two hateful, warring factions are those who have no allegiance. These are people and creatures who either run and hide when the great confrontations of the Light and Dark occur which shake history to pieces, or sell themselves to the highest bidder, or join whoever has the most powerful magics. Those of no allegiance care little for the outcome on doomsday, so long as their own skins are not hanging from the wall in another's trophy room. They have not pledged their soul to either the Light Sister of the Dark Brother nor the pantheon of gods and goddesses under them, nor the peoples who worship those, nor those who further their interests.
Against this backdrop, it should be pretty easy for heroics to occur. When Dark races meet the Light, there is an obligation to fight... a destiny to be answered!