There are two distinctive issues here:
- the faulty equipment
- the refund on labour owing to faulty equipment
The equipment, or part of it, does not work. Perhaps it is electronic in nature, there are other variables at play. Neither the seller nor the buyer could have figure this out. Unless you have a vibe that the seller intentionally sells you a faulty equipment (that you were screwed), there is always a risk in buying a used set. Trust is a big word, and if the equipment has worked in his car, no finger should be pointed. However, if he has the intention to offload a faulty set to you, then it is a different story altogether - not in this case as shown by his goodwill to refund the purchase.
Lemme share a modified story that can put the whole thing into perspective. Forumer A sold a used set of coilover (KW2) to forumer B. Forumer B tried to install it on his car, but it just would not fit. B has to pay workshop charges. A put back the KW2 on his ride - it works. Who's at fault? The true story is that the coilover could not clear B's rims. No one knows about this until the transaction took place. B pays for the labour charges and return the set to A. Case closed, lesson learnt. B might think he is the victim, but then again, things like that are associated with used parts purchase. Hence the buyer naturally bears more risks.
The refund on labour is gonna be tough. There is an unspoken "rule" even when buyers stripped a de-modding car apart. In cases between forumers, the parts are bought on knowledge that it "will" fit, or that it "will" work, then the onus is on the buyer to check on the compatibility - obviously the seller would not know as much as the buyer whether it will fit, or why should he? Case might be different for deals between resellers and forumers, since the resellers know the parts numbers and all. In your case, was there a check on the set before installation?
My take is that the case might not sounds fair to you. Then again, it would not be fair to the seller if he is asked to pay the labour for stripping the parts, especially if and when the equipment he sold is working perfectly (on his car). So, not a win-win scenario, inherent in the used parts transaction. But the seller is not at all "unfair" in his offer to refund you the purchase. Take it. And make a friend. He is not all out to "screw" you (I have heard cases where the blame is put on the buyer's car)......