Im sorry, but this really does not break existing lore.
Slavery need not be abolished, Black Marsh has historically sold Argonians into slavery itself, while border raids made up only a small percentage of the total.
It is not inconceivable they offer Morrowind slaves in exchange for the pact.
There has never been such a thing as the enslavement of the entire race.
There are many reasons why Molag Bal cannot just take over the world.
That the dragonfires are unlit at this time helps him, but there are other barriers in place such as towers and the Sotha Sil pact.
That he is scheming with Mannimarco in order to svck Tamriel into Coldharbour is a nice loophole in the rules, one that fits the sphere of the Lord of defilement.