A recent TV news program reported a bankruptcy at the Israel Diamond Exchange (IDE). The reporter had very little information about the event, but finished the report with the statement, "This case too will be concluded behind closed doors… as usual with the diamond industry." The only thing missing was a knowing wink that says, “you and I know what happens behind the closed doors of the diamond exchange.”

The not always favorable standing diamond traders have in the eyes of the public is about the same as that of politicians, lawyers and journalists. The not always positive image of the diamond industry is a direct result of a lack of understanding by outsiders on how the industry operates. Deserving or not, the arbitration process of the diamond industry is as efficient and effective as it is deeply rooted in the diamond tradition.

As academic research has demonstrated, the arbitration system evolved over more than a century and is supported by the ethnic and community make-up of the participants in the trade. There is no other industry in the world where someone who entrust someone else with parcels of millions of dollars being confident that he will get the (same) diamonds back.

Arbitration is a positive. In any industry disputes arise. As contracts are sealed verbally there are no documents drawn up by lawyers to consider. Arbitration is akin to the jury-trial system where your peers are judging you.

One common situation that the arbitration committees deal with is cases of traders failing to pay for their diamond purchases. As IDE president Yair Sahar recently told IDEX Online, a check given for payment must be honored by 2pm of the due date. If not, the defaulting trader faces immediate exclusion from the exchange. Therefore, if a trader has a problem meeting his obligations, the exchange summons him and the suppliers to whom he owes money and begins an arbitration process to work out a settlement agreeable to all sides.

Typically, this involves paying off part of the debt, either immediately or over time. The trader is often required to "bring money from home," for example, selling personal assets to help pay the debt.

The personal assets are brought into the equation because bourse members are fully responsible for their debts. In other words, although a limited liability company conducted business, the diamond trader still has to stick his hand deep into his personal pocket in case of a default.

Another remarkable feature of the arbitration proceedings is its speed. As soon as a default takes place, the resolution process begins and the sides reach an agreement within weeks, if not days.

While the internal workings of the diamond industry may not have the respect of the media, the Israeli legal system respects this system of arbitration, as a ruling from a recent court case show.

As first reported by Chaim Even-Zohar, Zvi Gal Diamonds went bankrupt a few years ago, leaving debts to fellow diamond traders and Bank Leumi. As usual, the debts to the industry were quickly worked out. The bank, however, took the "normal" route of going through the court system and appointed a receiver who found that the goods were already gone. The bank then turned to the court claiming that Zvi Gal preferred some creditors to others.

This process concluded only recently, years after the default took place. Tel Aviv County Court Judge Varda Alshech had to decide which law had precedent – the by-laws of the exchange or the bankruptcy laws of the country. In her ruling, Alshech rejected the bank's request to tie the personal assets of Zvi Gil the person to that of Zvi Gil Diamonds the company, even though she accepted it as a regular practice of the diamond bourse.

Rejecting the claim of creditor preference, the judge noted that the laws and by-laws of the diamond bourse are well known to those involved in the diamond trade – including the banks financing the trade.

The bank has a relationship with the industry that spans decades, which includes an active branch inside the bourse premises, meaning that the bank should be familiar with the industry's practices and by-laws. This includes knowing that bourse members are bound by these by-laws. Zvi Gal had to use his personal assets to pay his industry debts.

Judge Alshech set a legal precedent with her ruling. Because the arbitration process is also part of other diamond bourses' self-regulation, diamond traders and banks around the world should take note of this ruling. As Even-Zohar pointed out, the banks may now wish to increase the commitments of diamond traders or raise interest rates in view of a perceived greater risk on their part.

The TV news reporter has probably never heard of this case. Although she may want to wink, smirk or raise an eyebrow next time she reports on the diamond industry, she should know that the law is on the side of the deep-rooted and well-tested traditions of the diamond industry.

Traders find swift, accurate and practical justice in the by-laws' dispute resolution procedure, bypassing wasted years and costly legal fees while waiting for justice in the legal system.

No one is hoodwinked in the bourse procedures, except maybe TV viewers who are exposed to careless reporting.

You should follow me on Twitter (@edahn)
Get in touch on LinkedIn
Connect on Facebook
Or email at edahn at idexonline dot com with any questions