Had a similar situation and seller paid immediately. I just refunded through pay-pal promptly and explained the product was damaged - and left the buyer positive feedback, who intern left me very good feedback (for being honest).
stuff happens
The biggest heartburn I had with e-Bay was post Katrina. Ever tried to call e-Bay and talk to someone?
I have auctions running, ending, Buy it Nows, best offers, etc. No way to access the internet or even to ship things. I just wanted them to send an email to the buyers and give them the opportunity to opt out, cancel, whatever. No freakin way would they consider anything other than one of their general announcements of possible delays for sellers in the affected area. After 10 days you can imagine what kind of mail I had. 80% of the buyers were understanding - but there was the 20% the DGAF.