Oh crap. I'm sorry to see that! I agree with you. If collars were supposed to be on the pipe and they weren't, well then it's on him, not you.
I agree with bringing in good clay, but if the dam wasn't built with any, then what was the core made from?
Look at
http://ponddampiping.com/ They have anti-seep collars, and take a look at the siphon system. You may want to think about going that route to get the pipe out from being deep inside the dam. That will address the "proper compaction around the pipe" thing. You bring up a good point. If the water level showed that it didn't go over the emergency overflow, then why did the pipe wash out??