Opinions vary....here's mine. You got hosed.
What's wrong with going to your local service provider and expecting reasonable treatment and decent communication? And no, I'm not naive, but "reasonable and fair" is the starting point as we examine this thing. You've been criticized by some for not dotting all your i's and crossing all your t's, but it sounds to me like you held up your end of the deal in a reasonable way. Those who say you needed to be hyper cautious are admitting in their own way, that you're dealing with snakes from the get-go. The foul reputation of those who work on engines has been earned by their community at large. I'll bet you a large pizza that if you'd asked for everything in writing and in general covered your behind, they'd have given you a hard time. They'd paint YOU as unreasonable.
Also consider that many have pointed out that outboards are relatively easy to work on. Heck yeah. Try working on a 1966 Jaguar E Type...without all the right tools. Your shop fixes outboards. Day after day, outboard after outboard. They put the outboard on a stand. All the needed tools are a short reach away. The lighting's good. The radios's on. There isn't anything on your motor that can't be lifted easily with one hand. Working on a diesel in a cramped engine room is one thing, but your little motor could be lifted to the perfect working height and easily manipulated by the mechanic to access everything. Point is: I think one of the places where you got hosed is on time. I think you paid for the mechanic to pick his nose, take a poop, and get a start on lunch. Bottom line, I'm betting they charge for more hours on a given day than there are hours in a day.
The impeller was a good place to start for an overheating motor. They replaced it and it was still overheating. Overheating less? Just as much? Thing is, if they don't diagnose it right, they can just move on to the next possible cause and you get to pay for all the mistakes. Grrrreeeeaat. Okay, okay, it's nice to have a new impeller, but you get my point.
You were in an inherently unequal relationship. They took your engine and went to work behind closed doors. You can't prove a thing. And if you don't pay, they keep your engine. And sell it. If you and the mechanic were standing in front of "his honor", you'd be mincemeat. All they have to do is say they did the work...or that it needed the work. Unless you sneak a video cam into their service area, you got nuthin'.
And yes, you were treated poorly by them. Lousy communication. But that's expected in their field.
I took my outboard to a highly regarded outboard dealer and sailboat specialist here in Michigan. I gave them the symptoms the motor had, and they said, "oh, so you want us to replace the bla bla bla". I explained that I didn't want to tell them what to replace, but the symptoms are this. "Oh, you want us to replace......." "No, but here's what it's doing wrong, and I'd like you to fix it and let me know before-hand if it's going to go over $200.00." Bad communication? I agreed to leave the engine with them for repair and they said "okay". I asked, "are you going to give me a work order or anything". "Nope". "You just want me to leave the motor and walk away"? They became offended that I expected any documentation that I'd left a thousand dollar piece of equipment with them. One of the mechanics in the background was chuckling. I guess he'd seen it all before. I could call back a week later and ask how my motor was coming along and they could say..."motor, what motor....who'd you give it to"? The motor left with me. That was a recipe for disaster. They'd be at fault, but any of the posters on this forum would have put the blame on me. Rightly so.
Anyway, once you were in deep with them, I can't say what would have been the right thing to do. I'm amused greatly by the idea that you should have asked for more service and just walked way. "You know, I really like this engine, and wouldn't it be great to overhaul it completely so I could use it for years. Yeah, rings, pistons...sure, let's do it right!".
At least then by the time it reaches their sales rack, they'd have some skin in the game.
bottom line: IMO you got hosed. Not by the prevailing outboard service standards necessarily, but by any standard of reasonableness, oh yeah.