I believe the same thing happened on the October 20th tourney, Beggars vs Barons (it was a great tourney btw). However the outcome was different.
I lost the semifinals match to Arthanasios. On the other match, Rob beat Jen-i and dropped out. Jen-i played the final match (and actually went on to win the tourney).
Putting aside for a moment what the rules say, IMHO that was not right, even when it benefited me (I got auto 3rd place). I say this with great respect for his (or her, sorry) skills and impressive record, but Jen-i had lost a match, and actually was in the same situation as me. Losing the semifinals should mean that you get to play for the 3rd place, period. Things that happen during the finals (a drop out, for example) should not retrospectively change what happened during the semis. In other words, if you lose a match, you don't belong in the finals. Auto 1st place for the other finalist seems a whole lot less unfair to me; after all, he/she got to the finals for a reason.
I'm no sports expert, but think of a basketball or soccer tournament. Do you think that if one of the finalists is disqualified for some reason they call on the one that lost to them to play the finals? I don't think so (I checked the 2014 FIFA World Cup rulebook but it doesn't state what to do, it just says that FIFA will decide the outcome).
To sum up, IMHO the situation was handled correctly yesterday. I'd never ask to play the finals if the person that beat me at the semis dropped out, I'd just be super mad that he/she didn't drop out sooner
.