G'Day,

does it resolve as some sort of passive effect in the last framework action window of a challenge?

Or immediately after the first framework event ("Determine Winner of challenge").

I would say as a passive effect like deadly (got it in the FAQ) to avoid rule confusions and to damp down cards like Maester of the Sun.

Vengeful, like all other challenge-based keywords, is resolved as a passive effect. As such, it resolves in the common passive effect step of the "resolve challenge" framework action window after all framework events have been resolved. (So yes, Vengeful has the same timing as Deadly.)

Remember that all framework events have to completely resolve before passives or responses to any of them can take place.

Actually, this only applies to Vigilant, Vengeful and Deadly. Stealth and Renown have their own framework steps (so Renown will always resolve before Deadly and Vengeful). Intimidate, Melee and Joust are constant effects.

We often get the situation where one person is playing Lanister and has Cersei's Scheme and the other person is playing Martell

Both the plot card passive and vengeful passive occur at the same time - so the first player decides the sequence, typically stand for Vengeful and then kneel again due to the plot effect