Funnily enough, that's how I (and a lot of people I know) use Google Docs.

The version history is great if you accidentally delete something and want to go back, but I don't know anyone who relies on the version history as a kind of meaningful archive -- it's just too fragile. Unless you create named versions, changes get collapsed, and when you make a copy, the version history doesn't get copied.

And it doesn't prevent collaboration -- multiple people can still collaborate on one set of changes in one "branch" file, while other people can collabroate on another set of changes in another "branch" file. When collaboration is done on both, they can get merged into the master file.

You've definitely convinced me that Docs doesn't work for law firms, but mainly for other reasons. Using multiple versions of files doesn't defeat the purpose of Docs -- it still makes collaboration much easier, and nobody's stuck e-mailing files back and forth that are out-of-date by the time they're opened.

Your idea of a VCS for .docx is intriguing though. Good luck!