What type of legal relationship occurs when one party acts on behalf of another?

The correct answer is agency relationship because it specifically refers to the legal situation where one party, known as the agent, is empowered to act on behalf of another party, the principal. In an agency relationship, the agent has the authority to make decisions and enter into obligations that legally bind the principal in dealings with third parties. This is a foundational concept in both contract and corporate law, where the roles, responsibilities, and limitations of both agent and principal are defined.

In contrast, partnership involves two or more individuals or entities engaging in a business venture, sharing profits and responsibilities, but does not inherently involve one party acting on behalf of another. A contractual relationship reflects a mutual agreement between parties but does not specifically denote one party acting for another. An employment relationship typically involves an employee performing tasks or services for an employer under direction or control but also does not expressly imply agency in the sense of representing the principal in broader interactions with outside parties. Thus, the unique characteristic of having one party act on behalf of another distinctly defines the agency relationship.