Agents have the authority to act on someone else’s behalf. For example, if Mr. Rich does not want to attend an art auction because he’s too busy counting money he could instruct Annie to go to the auction for him and bid on the art. He’ll probably give Annie some instructions and then Annie, our agent, will have authority to bid at the auction on behalf of Mr Rich (Mr. Rich is called the principal). If she bids successfully Mr. Rich will have to purchase the art because Annie acted with authority on his behalf.
But let’s say Annie goes to the art auction and bids on some art without speaking to Mr. Rich first. Or, let’s say she signs a contract as “Annie, agent of Mr Rich”, to purchase some art from a gallery. She had no authority to do either action at the time so Mr. Rich does not have to purchase the art.
However, what if Mr. Rich looks the art and thinks that Annie got a good deal? Mr. Rich then goes ahead and accepts the art, pays the money, or engages in some other action to show that he approves of what Annie did. Even though Annie was not acting as an agent at the time, the law says that Annie was now an agent by ratification. We will pretend to go back in time and say that Annie was effectively acting as an agent at the time she bid on or purchased the art. Mr. Rich’s approval of Annie’s transaction with the third party (the art auction or art gallery) created a relationship of agency by ratification.