Which of the following best defines an agency relationship?

An agency relationship is fundamentally defined as a fiduciary relationship in which one party, known as the agent, is authorized to act on behalf of another party, known as the principal. This relationship typically involves the agent performing tasks or making decisions that legally bind the principal in transactions with third parties. The key characteristic of this relationship is the trust and confidence placed by the principal in the agent to act in the principal’s best interests, adhering to the duties of loyalty, obedience, and care.

In contrast, the other options do not encapsulate the essence of an agency relationship. For instance, a relationship between independent contractors lacks the fiduciary aspect and does not involve one party acting on behalf of another in a representative capacity. Similarly, a contractual arrangement between two businesses may imply a working relationship but doesn’t necessarily reflect the trust or authority typical of agency. Lastly, a partnership agreement indicates a different type of relationship where two or more parties engage in business together, sharing profits and losses, rather than one party acting on behalf of another.

Therefore, the correct definition hinges on the fiduciary nature and the representation involved in an agency relationship, making the first choice the best representation of this concept.