What happens when two diamond grading certificates show different results for the one diamond? COLEBY NICHOLSON explores a legal dispute surrounding the issue which demonstrates how a seemingly simple matter can spiral out of control and end-up in court!
IN A LEGAL dispute that may have wider consequences for the Australian jewellery market than first imagined, a consumer took a diamond dealer to a consumer tribunal because a stone he purchased received a grading report that differed to the grading report he received on purchase.
Lloyd Meehan purchased a 2.01-carat trilliant diamond from Diamond Exchange and it was sold with a Gemological Institute of America (GIA) Grading Certificate showing the stone as VS2 and D Colour. The purchase price was $19,573, inclusive of GST. On December 21, 2007 Meehan took the stone to Sydney-based Diamond Certification Laboratory Australia (DCLA) to be photographed and then decided to have it laser inscribed and graded. DCLA subsequently graded the stone as F colour. On receipt of the grading report showing an F colour, Meehan then complained to Diamond Exchange (DE) and the retailer offered to refund the full purchase price. DE manager, Terry Giles explained to Meehan that it was not uncommon for two different people and laboratories to grade the same stone differently. Meehan advised DE that he would not accept a refund, wanted to keep the diamond and, instead, requested a refund for the difference in price between an F and D colour stone of the same size. He estimated that to be $3,500. DE maintained that the original offer of a full refund was the most appropriate solution but the customer again rejected it. In an attempt to resolve the dispute, it was suggested that the stone undergo a second independent grading, this time by Bauer Laboratories in Melbourne. Meehan's fiancée then flew to Melbourne on January 17 to deliver the stone for grading and certification, which was again graded as an F colour. By agreement, DE would pay for the services of Bauer Laboratories and a copy of the certificate would be forwarded to Giles. On January 22, Meehan wrote to Giles stating, "Although Diamond Exchange graciously offered to accept the return of the diamond and refund all monies paid, this course of action is not appropriate due to the personalised laser inscription completed before the colour disparity was recognised." Refund plus expenses At this point Meehan requested a refund of the original $3,500 plus airfares for his fiancée to fly to Melbourne and other out-of-pocket expenses totaling $3,987. At the end of January 2007, DE director Johan Barry replied to Meehan's letter rejecting the refund and explained that even though two laboratories had graded the stone an F colour, "the body colour of a diamond is not the primary factor in determining the ultimate retail price of a diamond". Barry added: "The grades on colour and clarity reported by the laboratory are subjective and only an opinion on the day, this is not an exact science and this why no one can guarantee any outcome". It was at this point Meehan engaged the ACT legal firm David Lardner to write to DE. That four-page letter, dated February 25, 2008, outlined 24 points and concluded with a request for $5,000 to be paid within seven days. The solicitor's letter went on to state that if the proposal was rejected, Meehan reserved the right to obtain further legal advice. One interesting point was made throughout this dispute, and confirmed by Meehan's solicitors: the couple, who had spent considerable time investigating diamonds for the purpose of getting engaged actually liked the stone and wanted to keep it, regardless of the disputed colour. DE engaged its own solicitor to reply to Meehan's solicitor's letter. In summary of what was now becoming a complex issue, DE's solicitors essentially claimed that Meehan had received what he had purchased - a diamond with a GIA certificate indicating a D colour. Solicitors Read & Ley reiterated DE's offer for a full refund; they could return the diamond, removing the inscription, for a refund or they could keep the diamond and DE would pay the cost of the second certification by Bauer Laboratories and transport costs. Legal hearing Meehan and Shaw then applied for a hearing on March 17, 2008 in Sydney before the Consumer, Trader and Tenancy Tribunal (CTTT). The CTTT is a NSW government agency with the task of resolving disputes between tenants, landlords, traders and consumers in a timely and effective manner. Having been advised of the CTTT application, Barry wrote to the Tribunal outlining his company's position. His letter asked, "Can Diamond Exchange be held liable for damages (if any are suffered) for selling a diamond described in reliance on certification by GIA?" This legal issue is what makes this dispute interesting because it would appear that the consumer received what they purchased - a 2.01-carat, D-colour diamond - because that's what the certificate stated. Barry's point was that a differing grade from another laboratory does not mean the first grading was incorrect. Diamond grading is, in part, a subjective issue. Barry also asked, "If DE cannot rely on certification by GIA, (a foremost institution and inventor of the current grading system used world-wide), are therefore all other certifications obtained of no use?" He also argued, "If the tribunal were to find for the applicant (customer), it could only do so by calling into question the certification provided by GIA, on which the respondent (DE) relied in advertising the diamond for sale." Meehan's detailed written response to the tribunal before the hearing stated: "This goes to the core of the dispute. We agree we were sold a diamond with a GIA certificate stating that the diamond is D colour; however, we cannot agree that the diamond ‘is as described in the GIA certificate'. We assert that we did not get what we paid for, evidenced by two certificates from reputable Australian laboratories that state our diamond is F colour." The issue, even before it went to the tribunal, was about whether it could be claimed that one laboratory's grading could be determined as being incorrect when it is accepted that diamond grading is not science. Effectively, the tribunal was being asked to rule that the GIA grading was incorrect and the DCLA (and Bauer) grading was correct. Meehan's response to the tribunal also confirmed the earlier assertion that he and fiancée wanted to keep the diamond because they liked it. Prior to the hearing on July 10, Meehan wrote to the CTTT offering further evidence in support of its claim. Interestingly the evidence supplied was a story from Jeweller magazine. Meehan advised that DCLA had supplied him the article entitled, Retailers' use of grading certificates, written by the then Jewellers Association Australia (JAA), CEO Ian Hadassin. Jeweller is the official magazine for the JAA and the article was part of the JAA's monthly report to members and appeared in the July issue. While Meehan used the article in support of his claim, the article also confirmed that there is no single standard in Australia and the JAA believes it's vital that one standard be adopted across all Australian laboratories. Both grading reports correct The hearing took place on October 20 where, despite the presence of DCLA representatives as expert witnesses in favour of Meehan and Shaw, the tribunal ruled against Meehan's claim, citing: "There is no dispute that the applicants purchased a diamond which was graded on the GIA scale as a D grade diamond. This is what the applicants bargained for and got. “The fact that the diamond was recertified as an F grade does not alter this position, since this grading was based on different rules. Further there is no evidence that the Applicants have suffered any loss at all and, in fact, the Applicant's own witness claimed that they paid a very reasonable price for the diamond in question. The Applicants case fails for these reasons." Even after a lengthy dispute - it was more than 10 months after the diamond was purchased - Meehan believes the tribunal got it wrong. "We think the decision was wrong at law and failed to address any concerns to wider issues of consumer confidence," Meehan said. Meehan's now wife, Deborah, never believed the matter would go as far as it did. "We were absolutely astounded at Diamond Exchange's response to our request for a $3,500 refund. They dismissed it out-of-hand and we were not expecting that. We thought they would come back and say, "We'll give you $1,000 to go away," and we were expecting some recognition of the problem. We never thought it would get to where it did," she said. Barry insisted he wasn't trying to dismiss his customer. He believes if the product purchased is the product sold, then there is no problem. "It is not a matter of just paying money to make a problem go away. The customer must be protected and GIA and other widely recognised diamond grading certificates create a technical standard that is important to respect," Barry said. For the record, JAA CEO Hadassin believes that DE did the correct thing in offering a full refund, adding, however, "I think if no refund was offered, the tribunal hearing may have had a different outcome." Consumer has no protection Even after such a long and complex dispute, both Meehan and his wife still like the diamond: "We have a stone that we are very attached to, and we got it at a good price. Our greatest concern is that the Australian consumer still has no protection. "If I opened up my own company, LM Diamond Importers, and I graded a diamond and issued a certificate with or without training or expertise, if we followed the Tribunal's intent and logic - provided you were issued with a certificate and the diamond is what the certificate purported to be - I could issue whatever I liked," Meehan said. Hadassin does not agree: "While there are differing standards across the different labs, there is essentially a small number of recognised or accepted certificates, but I agree that diamond grading is not an exact science. The trade generally accepts one colour and clarity grading difference between labs. It is also important that CIBJO and GIA standardise their grading procedures. I will raise this issue at the next CIBJO congress." Both Meehan and his wife say they have no bad feelings about the experience, saying that the problem is not DE's doing but more about there being no scientific standard in diamond grading to protect the consumer. It's an industry issue, they believe. Deborah did say, however, "I would never buy a diamond again. That's nothing to do with whether I bought it off the internet or in a retail jewellery store. I would not be interested because I cannot be guaranteed what I am getting." Tom Moses, senior vice president, GIA Laboratory and Research weighed into the debate, saying, "Informed subjectivity enters into the equation of determining a colour grade. Such subjectivity is heightened when the diamond is a fancy shape such as in this case of a trilliant diamond. Colour grades are determined by comparing each diamond to a master set. Accuracy of master sets, the frequency by which the master set stones are boiled to retain true colour, the light source, background and the actual grading procedure can all have a significant impact on the appearance of colour." Important lesson The case has provided an important lesson to the industry because it shows that it's difficult to argue that one reputable grading certificate is wrong by using another reputable grading certificate that differs from the first. Given the grading processes use different methods, rules and standards, it's arguable that they are both correct. It is also a valuable lesson for the grading laboratories which might increasingly find themselves the meat in the sandwich between a buyer and a seller. In the wash up, there are no real winners here. Barry was adamant that he had no choice other than to defend the action in the CTTT. He believed his business had not done anything wrong. He reiterates that a customer purchased a product, the customer was not happy and he offered to refund the customer's money. However, the customer rejected the offer and instead wanted to keep the diamond but receive a substantial discount. Ironically, it's these same standards that have lost the industry another customer over a trust issue. Of this, Hadassin remains disappointed, "What is really sad about the story, no matter who is right or wrong, the customer stated that she would not purchase a diamond again. The industry simply cannot afford this type of outcome. "It behoves all those industry members who were involved in this case to ask themselves if they could have handled the problem better."
* The original story was published in Jeweller, February 2009 under the title, “Who’s right and
who’s wrong?” Footnotes: - Diamond Exchange was placed in administration in October 2010 and was subsequently liquidated and closed owing $2.5 million, with $1 million owed to consumers who never received their diamonds - here.
- The company’s assets were later purchased and the business name and website resumed under new ownership in February 2011.
- The new Diamond Exchange ownership is a non-related company - here.
- Ian Hadassin is no longer CEO of the JAA after his contract was not renewed in February this year - here.
- The Diamond Certification Laboratory Australia still operates in Sydney however it has a much lower profile in the industry.
- Bauer Laboratories closed in March 2012.
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