As far as I can see:
o Format | Default Formatting removes both direct formatting (to characters or paragraphs) and formatting by character styles.
o The Apply Style drop-down applies paragraph styles, so you'd expect "Clear formatting" there to reset the paragraph style to Default - and it does. But it also does the same as Format | Default Formatting as well.
For me at least, there's just too much to remember. (You're in a maze of twisty little passages. You're in a twisty maze of little passages. Now you're in a twisty little passage with a maze.) It's enough to make me lose my mind. I can't keep track of all these various intracacies. It sure would be nice to have some tool tips.
Also, if "Apply Style" applies paragraph styles and only paragraph styles, why not have it say "Apply Paragraph Style" so as to make it obvious and avoid the obscurity.
"Default Formatting" could either have a tool tip, or perhaps broken up into separate functions that do one thing each.
i.e. 1) Remove formatting to characters.
2) Remove formatting to paragraphs.
3) Remove formatting by character styles.
That would provide more control. I don't know if there's an advantage to it - other than knowing precisely what function is being performed.
In addition, I do NOT expect "Clear formatting" to reset the paragraph style to default. I expect it to do 1,2,3 above. i.e. Clear the formatting just as it implies. I would expect "Reset Paragraph Style to Default" to reset the paragraph style to default. There's far too much guesswork and intimate knowledge required here. It's all quite NON-obvious. Sure, if one works with it all the time one can learn these things - but I shouldn't have to be an expert - it should be intuitive and if it's not intuitive it should be spelled out in a tool tip.
I suspect that at least part of the problem here is that it is sometimes difficult to see - especially with an inherited document - exactly how formatting has been applied and consequently how it might be removed.
Oh yes and that hits the nail on the head. Now that the problem has been defined, the solution becomes easy. Provide a way to SEE exactly how the formatting has been applied - and a quick link shortcut to removing it! Formatting/styles are - in my mind - similar to field codes. They're hidden formulas and such that could be turned on and off for viewing at will.
Just my opinions of course.