These are two great characters, especially from the aspect of moral ambiguity. It's to the point that I have a lot of trouble deciding which one to side with and will probably just let them fight it out on their own on my current game.

At first I sided with Slackjaw, reasoning that although he's a thug, he can do less harm than a woman who's obviously touched by the Outsider, crazy and possibly undead.

But when Granny tells Corvo the story of Empress Jessamine and seems to pity her fate, it softened me a bit to her. Also her malice seems limited to the Bottle Street Gang and no one could argue they don't have it coming.

Thoughts?

I sided with Slackjaw, simply due to what Granny Rags was about to do to him. He certainly doesn't deserve that. In my opinion, it's irresponsible to let somebody like Granny Rags go - somebody who is clearly deranged (if even human), and incredibly dangerous. Slackjaw is certainly the lesser of two evils in that situation.

Well, I didn't hear Granny Rags' story about Jessamine, though I would be interested to know what it is. But in that scenario, I saved Slackjaw. Mostly because I was amused that he actually called me out on the fact that I robbed the Art Dealer's safe before passing the password along - heh - nice touch, so i figured I sort of owed him one. And Granny Rags... I never did her second part of her initial quest, because I realized it would have meant more weepers and the weepers sort of freak me out a bit.

I have trouble thinking of Slackjaw as too overwhelmingly evil. I mean he's no saint, the Bottle Street gang does plenty of terrible things. But at the same time he does deal with you fairly and keeps his word, and seems to be a desperate man trying to hold his little corner of Dunwall together. He's less evil to me than most of the nobles, overseers, and high-ranking watch officers. And he's brave and not afraid to get his hands dirty. So that's something, at least.

Can I ask when this encounter takes place? I didn't experience it on my first runthrough (Where I didn't meet with slackjaw nor did I complete Granny Rag's second task), but I have done these things in my current playthrough (Up to boyle party)

The encounter happens in the Flooded District level, in the sewers. You need to finish sidequests for Granny Rags during Overseer Campbell level
(Gentlemen Callers, Poison the Distillery) and then work with Slackjaw during the Golden Cat mission for it to appear. If you didn't do these
sidequests, then the sewer gate will simply be open. If you did the sidequests, then you will encounter a wounded thug in the sewers who will tell you
that Granny and Slackjaw are fighting, and Granny has the key to the gate, which is locked in this scenario.

I got it to happen by only doing the first parts of those two quests, defeating the 'gentleman callers' and getting the information for Slackjaw, but not poisoning the elixir or giving Slackjaw the safe combination.

Right, you get it even if you just do the first part of their quests. I can't poison the distillery anymore even though I did it on my first run. Can't see Corvo doing that if he reads the list of who gets deliveries, and the guard note that says poor people are buying the bootleg stuff because they can't afford Sokolov's. It's another point that makes Slackjaw not entirely a bad guy. Sure he is profiting, but the elixir probably is helping people.

A point against them- the encounter where you overhear the Slackjaw guys saying they shanked a guard for going below Clavering Blvd, and that he was an old guy who must have served the empress. I figure that means Corvo would know him.

I sided with Slackjaw when I had the chance on my first game. Second time through, I was being chaotic and Granny rags had...taken care of Slackjaw before I got there, we'll say.

If I'm thinking of the same story, I didn't really pick up any sympathy from Granny Rags. I think she's far more evil than Slackjaw. I mean, he's a businessman sure, and a black market one at that, but at least he's helping prevent the spread of plague. Granny Rags seems to be completely nuts, for one, and is willing to help further the spread of the plague for no real discernible reason, other than that the gang were 'bothering' her.

The gang are harassing everyone in the area, though, shaking them down in order to profit from a time of disaster.

Regardless, they're selling vials of apparently effective cures for the plague to people who would have no other way to get them. Granny Rags has you poison their still, poisoning not only the gang, but presumably everyone they sold it to as well.

First play through I killed Granny, second play through I killed both of them. However, I saved Slackjaw then killed him after getting the reward. Both bodies went into the tub.

I was totally shocked by the Slackjaw/Granny Rags showdown! I'd sided with Granny Rags and pretty much ran right into her expecting an open-arms welcome!!! Oh dear...