Bumping this because the cause and solution of the bug have been found.
decino made a video analyzing the bug and also offering potential methods of fixing it:
https://www.youtube.com/watch?v=PpfpfDNFdvQ Hopefully, the hex editing method also works for the GOG and CD versions of the game.
EDIT: Note that the addresses in the video are off. The correct addresses are:
TFE - 169860
TSE - 194CE0
See the attached screenshot, which shows the 1st Encounter. Replacing the first occurrence (green border) of 17B7 D138 with 0AD7 233D fixed the bug. Replacing the 2nd occurrence (red border, address mentioned in the video) does NOT fix the bug.
Same with TSE, replace the first occurrence at the 194CE0, NOT the one from the video at 194E2C.
The fix works both on the CD and GOG version too. Tested them both.