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The use of a non-hardening putty on a pre-finished floor is completely normal; over-application and the use of cleaning solutions that dissolved it and spread it seem to be the problems. Using too much putty would be the fault of the contractor; thinning and spreading it is the fault of the homeowner. The reaction to sue is disturbing, from a contractor's point of view. The fix would have been to wipe it down with a dry towel--a common sense approach well within the capabilities of a homeowner, or at least a reasonable request to make to the contractor.
Yes new floors require putty, from nail holes (yes nail holes) by walls, end joints sometimes are not perfect, high and low floor joist can cause problems with end joints. Usually a good idea not to clean new prefinished floors for a week, oil based putty can be cleaned off the floors with a rag dipped in mineral spirts.