MS has simply taken the same approach that Amazon has: don't sell through the app. They don't need to reach any agreement with Apple to do that.
The problem is that the iPad doesn't need Office to be successful, which didn't leave Microsoft much room for negotiation.
What does Office have to do with this? Anyway, the iPad owes its success to the availability of apps. When the other tablet platforms achieve parity in the list of "must have" apps, Apple won't be able to take such an arrogant position because it will cost them customers.