I'm going to have to side with the engine owner on this one. The engine was shipped with problems, the manufacturer was made aware of the problems and elected to attempt to work out the problems in the field, then the engine began to experience failure. Using the "field repair" method, the manufacturer accepts the risk of damage by the user if the manufacturer agrees to the method of repair.

The manufacturer should have requested the return of the engine from the beginning, and should now offer to repair or replace it with a split shipping costs to keep it somewhat fair to both.