Well, this is my take. He has offered to repair your engine for no charge and maybe even give you a little money for the R&R. That seems totally fair to me. Everybody makes mistakes and no I don't think tacking a chunk of metal to the counterweight is proper.
I would let him repair it on his dime, get what money you can from him then I would take the repaired engine apart and check everything. Get what ever you want fixed, fixed somewhere else and move on.