What defines an agency relationship?

An agency relationship is best defined as a fiduciary relationship based on trust and confidence. In this type of relationship, one party, known as the agent, is authorized to act on behalf of another party, known as the principal, and to create a legal relationship with a third party. The crux of an agency relationship hinges on the agent’s duty to act in the best interests of the principal and to carry out their instructions with care, loyalty, and in good faith.

Trust and confidence are fundamental because the agent must be trusted to represent the principal's interests effectively. This goes beyond a mere transactional nature; it encompasses the responsibility of the agent to manage the principal's affairs according to the principal’s desires and best interests. The fiduciary duty requires that the agent avoids conflicts of interest and fully discloses relevant information to the principal.

The other options provided do not capture the essence of an agency relationship. A formal contract between two businesses may establish various types of business interactions but does not inherently create the fiduciary trust characteristic of agency. A service agreement between a freelancer and a company could entail various types of contractual relationships without the fiduciary duties that define agency. Lastly, a partnership based on shared ownership represents a different legal structure where partners share profits