Watch Your Language

October 1998

Managing:Appraisals

Watch Your Language

Descriptions of gemstones, such as those in lab grading reports, can change depending on the grader. Be careful in your appraisals that your words don't imply a warranty of these subjective opinions. Such "guarantees" could come back to haunt you

by Al Gilbertson

The legal world has laws or codes that, while seemingly unrelated to appraisals, do have an impact on the daily work of appraisers (Professional Jeweler,August 1998, p. 122). Most jewelers are unaware an appraisal given out at the time they make a sale (whether by an independent appraiser or on the store's letterhead) can be construed by courts as a "warranty" of the description, quality and sometimes value of what is sold.

A recent court case involved a customer who paid $444,500 for a 14.05-ct. D internally flawless diamond ring with a grading report from the GIA Gem Trade Laboratory. The jeweler wrote an insurance report saying the diamond was D internally flawless and valued at $444,500. Three years later the customer tried to sell the diamond. The new buyer made the sale contingent upon recertification of the diamond. The Gem Trade Lab, in a new report, called the diamond E internally flawless. Based on an express warranty provision of the Uniform Commercial Code, the customer sued the jeweler for the value difference between a D and E internally flawless 14.05-ct. diamond. She said the jeweler warranted the diamond to be D color and because it was now an E color, there was a breach of warranty. The Florida Supreme Court agreed.

Further, the court decided the UCC express warranty provision applies only to the seller and does not include third parties &150 the lab in this case. Because the lab report was used as part of the sale and the customer relied on it, the court viewed it as part of the "basis of the bargain" (a legal term) and as a warranty by the jeweler. The court continued: "There were no representations made at the time of the sale to dissuade plaintiff from relying on the accompanying report. I further find the report to state facts and not mere opinions. Certainly to an unsophisticated buyer a diamond's rating of color and clarity appear to be objective enough to be relied upon."

The court said the diamond must have always been E color (ignoring the first report), therefore, it was a breach of warranty on the sale date.

It isn't just lab reports jewelers should worry about. Any gemstone grading you do in an insurance report can be misread as a warranty in the same way. In another court case, a jeweler was careful to state that his valuation was only an opinion, but the judge ruled his diamond description was still written as fact and fell under warranty law.

A jeweler can turn around and sue the lab. But just because a consumer wins a case against a jeweler doesn't mean a jeweler will win against a lab. To successfully sue a lab, a jeweler has to prove the grading was not only incorrect, but that the lab was negligent. Negligence means the lab failed to use reasonable care in grading. This is an uphill battle because grading, even when done with rigorous care, is subjective in nature.

Cover Letters
A jeweler/appraiser or independent appraiser can avoid this kind of legal predicament in several ways. Cover letters on point-of-sale reports can help. A cover letter explaining gemstone descriptions could read: "The specific descriptions of each gemstone in the jewelry appraised here are based on the gemstone characteristics of weight, cut, clarity and color. The grading of cut, clarity and color is a subjective process, even when performed by competent gemological laboratories. Two labs grading the same gemstone can come to different opinions. Even the same lab can grade a stone twice and arrive at different opinions. You should understand that the descriptions and identifications made here, along with the valuations, are opinions only and are not intended to be an express or implied warranty or guarantee." (Before using this wording, discuss it with an attorney.)

Even this type of cover letter won't protect you if your sales associate blows it, however. If the associate tells the customer a diamond is of a certain quality but doesn't say it's based on a lab's opinion, the verbal sales pitch amounts to an express warranty too.

Education Needed
Appraisal courses have not taught this subject carefully. Lack of information about what constitutes a warranty and specific warnings about the possible consequences of the language an appraiser uses are perhaps most obvious in the Gemological Institute of America's "Insurance Replacement Appraisal" course. While referring frequently to civil liability if an item is overvalued or misgraded, the course never specifically covers the UCC's express warranty provision (see box) and how it can trip up an appraiser.

The GIA course and the Jewelers Vigilance Committee Appraisal Guidelines, which GIA notes in its course, encourage the preparer of any report to add a certification statement such as: "I certify to the best of my knowledge and belief the statements in this document are true and correct, including representation of quality and quantity."

GIA also encourages the statement: "Every effort has been made to grade the gemstones described in this document as accurately as possible, within normal, reasonable and acceptable gemological ranges. Opinions of quality and grade may vary upon re-examination or examination by another qualified grader."

Though the second paragraph is meant to protect the jeweler by correctly pointing out that grading is subjective, it may not be enough in the eyes of a court to undo the damage done by the first "certifying" statement.

Certifying that a representation of quality like a lab report is true would probably appear to the court as an express warranty. (Webster's Collegiate Dictionarydefines certify as "to make known or establish [a fact] or to guarantee the quality or worth of.")

A better approach may be using a clause from the government's Uniform Standards of Professional Appraisal Practice: "I certify that, to the best of my knowledge and belief, the reported analyses, opinions and conclusions are limited only by the reported assumptions and limited conditions, and are my personal, unbiased professional analyses, opinions and conclusions [USPAP Standards Rule 8-3]. This statement, though virtually untested in court at press time, may better protect you from legal action. But once again, consult with your attorney on specific wording.

Al Gilbertson owns Gem Profiles, an independent appraisal service in the Pacific Northwest. A member of the American Gem Society and the International Society of Appraisers, he was also a member of the Jewelers Vigilance Committee's Appraisal Task Force, the Gemological Advisory Committee of the AGS Gem Lab and the AGS Appraisal Committee. He is a fellow of the AGS Jewelers Education Foundation, director of research for the Diamond Profile Laboratory and editorial adviser toThe Guide,published by Gemworld International.

Talking in Code

Here is the exact wording of the express warranty provision of the Uniform Commercial Code (UCC § 2-313):

"(1) Express warranties by the seller are created as follows:

(a)Any affirmation of the fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b)Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c)Any sample or model which is part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2)It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty."

 

 



Copyright © 1998 by Bond Communications.


 

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