How can they be legal? if i'm not mistaken in Morrowind each one of the great houses has a few cities of their own to rule and operate from it, and they are in charge of the settlements they live in, is that correct? well lets say the tong provides legal executions, do the houses hire the tong to assassinate each other, and yet this is legal? for example House Redoran hired the guild to assassinate a member of lets say House Telvanni. a guard catches the assassin but the assassin shows him the writs so the guard releases him because the act was completely legal. days later the Telvanni hires the same guild to assassinate a House Redoran member as a payback, the assassin completes his task and after he exits from where his target was killed a Redoran guard sees him but he cant arrest him because he has a writ, so he lets him walk back to his guild to continue to do this all over again?

am i missing something here? or is the tong ruled by one house only who is in charge of all of Morrowind and has the higher power?

What is legality?

In Morrowind, the Houses are in charge of law enforcement within their territory (with the Temple in charge of law enforcement in Temple controlled areas). The Houses have all agreed to allow writs of execution which makes them "legal".

The Morag Tong is ruled by Mephala. It exists outside of the political institutions of Morrowind. It's a group introduced by the religious teachings of the Good Daedra with the purpose of allowing the great houses to quarrel without messy and destructive feuds that would weaken the dunmer as a whole.

You've got the gist of it. Dunmer don't operate by your morality, but rather exalt assassination as an honorable and legitimate method of conflict.

and i thought Skyrim and the Nords were harsh.. I understand how it works a bit more now.

The Nords are still harsh, just in a brutish and disorganized fashion. Unlike the Dunmer, who like to do things by the book (which was stolen by Tyler Stowell).