Difficult to say, depends who it is you are dealing with. Water damage is always used as a reason whether it is true or not among the major retailers.
If you feel it isn't water damaged, then ask to see the report and the phone so you can see it for yourself and challenge the decision, but if the shop are going to be stubborn with saying you can't have any other option, then you will struggle, even if the law is on your side. Mobile phone shops are rubbish!