Diplomacy is a heavily buggy feature in the game. Due to that, little is known about it. In the official version of the game, diplomacy mainly consists of trading spells and making peace with AI players. The remaining features are rarely used, and the AI is almost completely unable to interact with the player on their own, except for sending a declaration of war. Although the game has a diverse and rich diplomatic system comparable to Master of Orion, most of it is not functional, buggy, or halfway implemented.
Recent investigation of game code revealed how it (mal)functions, and the new Unofficial Patch 1.50 attempts to fix all of these problems.
Diplomacy in Master of Magic always happens between two players who can be human or AI, so everything below refers to the relation between exactly two players in the game.
Diplomatic system overview
Master of Magic is a single player game, with multiple AI controlled players. The diplomatic system respects this setup, and has completely different rules for the human player, than for the AI controlled players. The general concept is, the human player is supposed to handle diplomatic decisions based on their own will, as such, they aren't bound by variables at all. Contrary to this, AI players base their decisions on calculated formulas and variables, with some random chance mixed in. This asymmetry leads to 3 completely different cases of interactions between players, which are : Player to AI diplomacy, where the human player is requesting or offering something from/to an AI, AI to player diplomacy, where the AI wants to tell something to the human player, or is making a request, and finally, AI to AI diplomacy, where two AI players interact.
The treaty status is the official status of relations between two wizards. There are four possible options : War, None, Wizard's Pact and Alliance. It's important to mention that despite the name, Peace Treaty is not an actual treaty status, but a special condition, which can coexist with any of the above except War. The human player can see the treaty status of any player with any other player.
The game tracks the relation of the two involved parties in multiple variables, each having their own purpose. Although the player can only see one of these, and only indirectly, in the form of a single word describing the relation under the wizard's portrait, it is useful to know about these variables, and how they affect the interaction between the two players. The human player cannot see any relationship variable between AI players at all, not even indirectly.
Permanent variables are variables that do not change on their own without a source to trigger a change. This source can be Player to AI Diplomacy, AI to Player Diplomacy, AI to AI Diplomacy or a Diplomatic Reaction to an action of another player, or the state of the game.