The Valar had no choice.
By declaration of Eru, grace has to be given to those who seek it. Formendacil's quote is a good one, but there's a little more behind what Manwe did. Ulmo and Tulkas, despite being rightfully suspicious, would have been wrong had they pushed Manwe towards not excusing Melkor. Even if Manwe wanted to, he could not have refused Melkor's repentance.
Osanwe-kenta:
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Melkor had the right to exist, and the right to act and use his powers. Manwe had the authority to rule and to order the world, so far as he could, for the well-being of the Eruhíni; but if Melkor would repent and return to the allegiance of Eru, he must be given his freedom again. He could not be enslaved, or denied his part. The office of the Elder King was to retain all his subjects in the allegiance of Eru, or to bring them back to it, and in that allegiance to leave them free.
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The release was according to the promise of Manwe. If Manwe had broken this promise for his own purposes, even though still intending "good", he would have taken a step upon the paths of Melkor. That is a perilous step. In that hour and act he would have ceased to be the vice-gerent of the One, becoming but a king who takes advantage over a rival whom he has conquered by force. Would we then have the sorrows that indeed befell; or would we have the Elder King lose his honour, and so pass, maybe, to a world rent between two proud lords striving for the throne? Of this we may be sure, we children of small strength: any one of the Valar might have taken the paths of Melkor and become like him: one was enough.
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Also,
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Or does such a thing as work against Ilúvatar even exist, if everything is due to fate and everything is set before it happens?
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There is such a thing as working against Eru (though unsuccessful work) as in 'sinning' or acting in a way that would displease him - every being has freewill. I think this is where the confusion lies (as it has been a problem for a long time). Those 'working against Ilúvatar' are only '
attempting to work against Ilúvatar.'
Eru speaks to Melkor on his 'misbehavior' in
The Silmarillion:
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And thou, Melkor, shalt see that no theme may be played that hath not its uttermost source in me, nor can any alter the music in my despite. For he that attempteth this shall prove but mine instrument, in the devising of things more wonderful, which he himself hath not imagined.
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Do as he may, Melkor cannot prevent good from prevailing. No matter how many things he destroys, no matter how many people he corrupts, he cannot remove the ultimate good present in Ea and everything in it. That is, he can choose his own fate, and influence the fate of others (though it is ultimately their own doing). What he cannot do is 'create' a new 'fate' for himself that goes against Eru's creation, against the music...that is impossible. It's what he set out to do, and obviously failed.
These points aren't really what the initial poster was talking about though.
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What happens after death/at the end to those of the children of Ilúvatar who have somehow "worked against him"? [...] And what about Melkor? Will he be punished or wil he have grace?
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As for men, we do not know what happens to them after they die and their spirits leave Arda, whether they were good or not. What happens to them at the end of the world is unclear, if anything. Upon death, elves go to Mandos; some (good) are reembodied, others are made to wait in Mandos. Their final judgement will not happen until the end of Ea.
Elves and dwarves will be with the Valar again when the world is remade and 'starts over.' As for Melkor, he has been thrown out into the Void and remains there until the final battle at the end of the world. I would guess that 'evil' children would suffer the same fate as Melkor. Melkor meets his 'final death.'
Unfinished Tales
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Manwë will not descend from the Mountain until Dagor Dagorath, and the coming of the End, when Melkor returns.
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Morgoth's Ring
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Even to the final war against Morgoth it is Fionwë son of Manwë who leads out the power of the Valar. When we move out Manwë it will be the last battle, and the end of the World (or of 'Arda Marred') as the Eldar would say.
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(Fionwë, son of Manwë, was later changed to Eönwë, the herald of Manwë)
The Peoples of Middle-Earth
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...unless the prophecy of Andreth the Wise-woman should prove true, that Turin in the Last Battle should return from the Dead, and before he left the Circles of the World for ever should challenge the Great Dragon of Morgoth, Ancalagon the Black, and deal him the death-stroke.
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The Lost Road
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Thus spake Mandos in prophecy, when the Gods sat in judgement in Valinor, and the rumour of his words was whispered among all the Elves of the West. When the world is old and the Powers grow weary, then Morgoth, seeing that the guard sleepeth, shall come back through the Door of Night out of the Timeless Void; and he shall destroy the Sun and Moon. But Earendel shall descend upon him as a white and searing flame and drive him from the airs. Then shall the Last Battle be gathered on the fields of Valinor. In that day Tulkas shall strive with Morgoth, and on his right hand shall be Fionwe, and on his left Turin Turambar, son of Hurin, coming from the halls of Mandos; and the black sword of Turin shall deal unto Morgoth his death and final end; and so shall the children of Hurin and all Men be avenged.
Thereafter shall Earth be broken and re-made, and the Silmarils shall be recovered out of Air and Earth and Sea; for Earendel shall descend and surrender that flame which he hath had in keeping. Then Feanor shall take the Three Jewels and bear them to Yavanna Palurien; and she will break them and with their fire rekindle the Two Trees, and a great light shall come forth. And the Mountains of Valinor shall be levelled, so that the Light shall go out over all the world. In that light the Gods will grow young again, and the Elves awake and all their dead arise, and the purpose of Iluvatar be fulfilled concerning them. But of Men in that day the prophecy of Mandos doth not speak, and no Man it names, save Turin only, and to him a place is given among the sons of the Valar.
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(Door of Night = Ando Lomen, the gate in Valinor that opened up the Timeless Void)
After the final battle, the world is destroyed and remade. The music continues, including 'choirs' of the Children. From
The Silmarillion:
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Never since have the Ainur made any music like to this music, though it has been said that a greater still shall be made before Ilúvatar by the choirs of the Ainur and the Children of Ilúvatar after the end of days. Then the themes of Ilúvatar shall be played aright, and take Being in the moment of their utterance, for all shall then understand fully his intent in their part, and each shall know the comprehension of each, and Ilúvatar shall give to their thoughts the secret fire, being well pleased.
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The world will be remade by Aule and the dwarves:
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...then their [ed.:dwarves] part shall be to serve Aule and to aid him in the remaking of Arda after the Last Battle.
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There are a couple of other versions and comments on the Dagor Dagorath (the prophesied Last Battle), but the account from
The Lost Road is the most complete written conception of that battle.
Tolkien was never completely sure of this end. Especially after he decided that Arda eventually became the earth we live on, it was unclear whether or not this last battle would take place...undecided on whether the earth ends peacefully or that this battle will still take place at the end of our time. Turin's part in the final battle, an early idea, definitely appears to have been omitted in later ideas on what would happen. (
Mithadan talks about the different standpoints on what could've become of the final battle in Tolkien's mind
here.)