Right, gotcha. I still disagree though even if that's the case: Sometimes things go wrong in business and it's not always the fault of the company, and whilst it's always important to maintain customer relations it's not worth doing it all the time when it's not your fault, as you'd soon not have a business to run with all the excess costs!
Had the flywheel supplied by the OP been fine then there would've been no issues here, but from that one thing it's all spiralled out of control and gotten steadily worse. No one has come out of this with no blame, but it's important for all parties to move on and learn their lessons.