Have you run the "new" new engine out of the barrel? I'm not sure if you can spin it up to full throttle with that little water. Just a thought. I can imagine you're pissed as hell. Glad I didn't buy from Defender. I ran a 20hp Tohatsu for 2 seasons without a hitch that I purchased from OnlineOutboards in TN. They are the same engine off the same lines as the Mercs up to 25hp. Never heard the Chinese gas excuse. Pretty disgraceful service.
if you want legal advice i would chat with peco from ctfishtalk. I dont know what type of lawyer he was but the only one i know for sure on the boards!!!!
At this point, I'd demand a refund or a Nissan. They come off the same lines as the Tohatsu and are about the same price point. At least a different "brand" probably didn't come from the same production run. I would consider taking them to small claims court, as well as "rate" them on any sites I could locate. Be factual so they can't come back after you.
Just Googling them, I came across this on the first page:
http://www.thehulltruth.com/boating-forum/13482-boat-life-defender-marine-should-i-say-offender-marine.html