Ok so let me get this straight (lot of uneeded crap in there)

You go into shop.
They refund the labor money.
You take engine and your labor money and go somewhere else for swap.

Is this correct?

If it is then I don't see what there is to bitch about except that they are backing out of the labor side which is pretty fucked up. The good part of it is that you can find someone else to do it for less than you had stated. In fact you could buy the tools and do it yourself in a week your first time out and have it running fine.