The narrator describes Gadsmere, which is the "rambling, patchy" house where Lydia Glasher lives with her four children. It is secluded and rural. Lydia likes it because nobody knows her backstory and she doesn't feel like anybody is judging her.
We learn that, ten years ago, Lydia was married to an Irish officer. She ran away with Grandcourt, and then there was a duel between Lydia's husband and Grandcourt. Nobody was shot.
After all that, Grandcourt got tired of Lydia. He also felt that he should marry someone who came from a good family and not someone who had so much scandal attached to her name. Sorry, Lydia.
Grandcourt was able to get on with his life, but Lydia was ruined forever.
We find out that, at the time of the affair, Grandcourt felt more passionately about Lydia than he ever did about anyone else. He was willing to pay for Lydia to get a divorce, but her husband wouldn't consent to it because he didn't want there to be a record of his disgrace.
We find out that Lydia's husband has since passed away. We also find out that, when Lydia left her husband, she had a three-year-old son who she left behind. He died, too.
The four kids that she has now are all Grandcourt's. If Grandcourt married her, they would all technically be legitimate.
Grandcourt has been providing money for Lydia and the kids for years, but it's totally voluntary on his part. She doesn't ask for anything else because she hopes that he'll marry her one day.
So, now Grandcourt has to go break the news to Lydia that he's going to marry Gwendolen.
There's one other big reason to go visit Lydia: he once gave her his mother's diamonds, and he needs to get them back so he can give them to Gwendolen. Once upon a time, Lydia promised to give back the diamonds if Grandcourt ever married another woman. We get the vibe, though, that she didn't expect that to actually happen.
When Grandcourt gets to Gadsmere, all of the kids are there. We find out that they don't especially like Grandcourt.
Grandcourt tells Lydia that he's thinking of marrying Gwendolen, and that he knows that Lydia spoke with her. Lydia is worried that Gwendolen broke her promise not to tell about their meeting, but Grandcourt assures her that Lush was the one who told him everything.
Lydia is obviously upset. Grandcourt is annoyed with the whole situation. He tells her to quit her whining – he's still going to keep giving them money.
He also rubs it in by telling Lydia that he's her only friend.
To make things even worse, Grandcourt is like, "Oh, those diamonds – I need them back." Lydia tells him that she'll arrange for the diamonds to get to Gwendolen, because she never promised to give them back to Grandcourt; she promised to give them to his wife, and Gwendolen is not his wife yet. Oh, snap.
Grandcourt gets really mad and wishes that he could hurt her. Lydia feels bad and tells him that she doesn't want to say goodbye angrily. She points out that when he gave her the diamonds, he wasn't planning on ever marrying anyone else. She's way hurt.