For those who have not completed Xenoblade Chronicles, this page or section may contain spoilers regarding the plot. Discretion is advised.
The Battle of Sword Valley was an important event that took place one year prior to the events of Xenoblade Chronicles. It is during this battle that the player (who controls Dunban during this section of the game) learns how to use the Monado. This event is the prologue of Xenoblade Chronicles.
The battle took place at Sword Valley, where the Homs tried to prevent the Mechon from reaching Bionis. The Mechon attacked in droves, forcing the Homs armies to fall back. Dunban—wielding the Monado—ignored the order to retreat, aided by Dickson and Mumkhar. Unfortunately Mumkhar—to the horror of Dunban and Dickson—deserted and fled, only to be presumably killed by the Mechon. Dickson and Dunban succeded in driving back the Mechon, but the effort of wielding the Monado cost Dunban the use of his right arm.
This battle is referenced by various characters several times throughout the game.
While Shulk and his party go to the Mechonis Core to fight Egil, the Allied Force of Bionis leads an attack on Galahad Fortress. This becomes the Second Battle of Sword Valley, and is fought between the Allied Force — the Nopon, Homs, and High Entia — and the Mechon. Alvis realises that Mechonis is awakening, and Kallian orders a full retreat as Mechonis removes its sword from Bionis' body, effectively ending the battle.