Maybe it's just the fact that I haven't played Morrowind, but I have no idea how a group of - let's face it, people - cold-blooded killers, can have legal sanction.

Keep in mind, these guys aren't just bounty hunters or those carrying out death sentences. According to UESP, "[t]hey have been active since at least the First Era, and their targets have included multiple rulers of Tamriel, high-ranking Dunmer nobility, and countless others." So, clearly, the government isn't the one handing out the contracts; they are entirely privately-funded.

Nor can we compare their practice to the way Skyrim has "challenges in the old traditions," where a duelist who kills his opponent has the affirmative defense of consent to his murder, and furthermore, there are actual rules to the combat. The Morag Tong just seems like a group of cutthroats who simply have the power to walk right up and plunge the dagger into your chest in front of everyone without retaliation, instead of having to sneak around and wait for there to be no witnesses.

So... what the hell is the government doing giving legal sanction to a group of contract killers? How does the Dunmeri government justify this?