Before the events of the first game, the elven court was decimated by humans, an invasive race new to the Blessed Continent at the time. The elves split into two factions. The son of the slain king Inioch, Meandor, led the dark elves and the Cult of Storms, a group that intended to wipe out the humans. Inioch's daughter, Julia, led the wood elves and the Keepers, a group that had no genocidal intentions. These factions and others clashed in the Valley of Wonders, around the ruins of the razed elven court. The High Elf race was founded many years later when Julia married a dark elf and reunited their two races. Meanwhile, the Commonwealth Empire began as a joining of races for mutual protection and the sharing of knowledge. Though it set out with benign intentions, once the Empire was through expanding, humans seized power and pushed forward with technology and commerce.
The Commonwealth Empire means to sweep aside the old ways and assimilate the world. The Elven Court takes exception to this, and wants to rally the ancient races to stand in defense against imperial ambitions, hence the central conflict of Age of Wonders III.
Source: Wikipedia, "Age of Wonders III," available under the CC-BY-SA License.