Quid Pro Quo: Definition, Examples, and Legality

What Is Quid Pro Quo?

Quid pro quo is a Latin term for "something for something" that originated in the Middle Ages in Europe. It describes a situation when two parties mutually agree to exchange goods or services reciprocally. In a quid pro quo agreement, one transfer is thus contingent upon some transfer from the other party.

In business and legal contexts, quid pro quo conveys that a good or service has been exchanged for something of equal value. It has been used in politics to describe an unethical practice of "I'll do something for you, if you do something for me," but is allowable if bribery or malfeasance does not occur.

Understanding Quid Pro Quo

The key to a quid pro quo business agreement is a consideration, which may take the form of a good, service, money, or, financial instrument. Such considerations are attached to a contract in which something is provided and something of equal value is hence returned in exchange. Without such considerations, a court may find a contract to be invalid or nonbinding.

Additionally, if the agreement appears to be unfair or overly one-sided, the courts may rule that the contract is null and void. Any individual, business, or other transacting entity should know what is expected of both parties to enter into a contract.

A bartering arrangement between two parties is an example of a quid pro quo business agreement where one exchanges something for something else of similar value. In other contexts, a quid pro quo may involve something along the lines of a more questionably ethical situation involving a "favor for a favor" arrangement rather than a balanced exchange of equally valued goods or services.

Negative Perception of Quid Pro Quo

Quid pro quo arrangements can have negative connotations in certain contexts. For example, in a quid pro quo agreement between an investment bank's research arm and a public company, the bank might amend its rating of the company's shares in exchange for underwriting business.

In response to these potential conflicts of interest, U.S. financial regulators have investigated and issued rules to ensure that firms put customers' interests before their own in issuing stock ratings.

Another example of a questionable quid pro quo agreement in business is a soft dollar agreement. In a soft dollar agreement, one firm (Firm A) uses another firm's (Firm B) research. In exchange, Firm B executes all of Firm A's trades.

This exchange of services is used as payment instead of a traditional, hard dollar payment. Research has shown that transactions executed under soft dollar arrangements cost more than execution-only arrangements.

Still, soft dollar arrangements such as these are legal in the U.S. and other places, though discouraged in some jurisdictions and viewed as unethical by some critics.

Quid Pro Quo in Politics

Quid pro quo arrangements may also exist in the political realm. As an example, in exchange for donations, a politician may be obliged to provide a future consideration regarding policymaking or decision-making.

Such a quid pro quo does not always imply a bribe, however, merely the understanding that the politician will consider the donor's wishes when creating policy or voting on legislation.

Much controversy surrounds quid pro quo in politics—so much so that, in the last 40 years, many cases have appeared before the Supreme Court to define what constitutes an illegal agreement.

The Bottom Line

Quid pro quo is the act of doing something in exchange for something of equal value. It is usually not a monetary agreement but typically one service for another; most often it is a favor that is granted by one party with an expectation of an equal favor or service to be returned in the future. It is used widely throughout business and politics.