Louka tells Sergius that Raina protected Bluntschli when he burst into her room and that Raina is really in love with him. Sergius challenges Bluntschli to a duel, but Bluntschli avoids fighting and Sergius and Raina break off their engagement, with some relief on both sides. Major Petkoff discovers the photograph in the pocket of his old coat; Raina and Bluntschli try to remove it before he finds it again, but Petkoff is determined to learn the truth and claims that the "chocolate-cream soldier" is Sergius. After Bluntschli reveals the whole story to Major Petkoff, Sergius proposes marriage to Louka (to Major Petkoff and Catherine's horror); Nicola quietly and gallantly lets Sergius have her, and Bluntschli, recognising Nicola's dedication and ability, offers him a job as hotel manager.