Hey Dave, while I'll bow to John T on the legal aspect of things, as a mechanic by trade I will offer this advice. When it comes to how an machine got damaged, more often than not, the owner/operator will lie through their teeth, especially if they feel it's in their best interest to do so. I've seen engines run low on oil til they locked up where the owner/operator claimed the oil had just been checked. I've seen an 8V-71 Detroit with both heads cracked and the block split down both sides from the deck to the mains, NO coolant at all in the system, black nodules in the water jacket from the heat, yet "it never ran hot". I've seen worn bushings in the main drum shaft on a crane that had "a whole case of grease" used on them. Funny thing when I removed the grease lines they were full of the red grease I used to grease them and not a sign of the blue grease the machines owners used. Needless to say they didn't get the warranty repair they thought they were getting.
In your case the whole story you've been told just doesn't add up to me. The price they are giving sounds more like they want something more along the lines of a partial overhaul, not just a head gasket replaced. If the head gasket was bad the engine should have run hot before the guy shut it down. That is unless he got really lucky and it blew within a couple of minutes of shutting it down the one time he ran it. Really though, who buys a 'new' tractor and only runs it for ten minutes, especially over the course of several weeks? Most of the guys I know would have to be drug off of their 'new toy' and ten minutes wouldn't even begin to cover the time they spent on it joyriding, and showing it off to the wife and friends the day they got it home. Seriously, I doubt the guy spent his hard earned money for a 'new' tractor to just let it set for several weeks right after buying it.
That said, ten minutes of continuous use should have been enough for the engine to run hot. That's the only usage i can imagine because who is going to use a tractor multiple times for only a minute or two at a time??? So, like I said, unless the gasket blew just as the guy was shutting it down from it's one use he should have seen it overheat and shut it down from there. Then the coolant would be able to flow out of the coolant system and get into the oil and the head gasket and an oiul change would be all that was needed. NOW, if it was run for any length of time with coolant in the oil then there is the possibility of damage to the bearings, and that would require a rebuilt. If that's what happened then their continued use of the tractor after overheating and getting the coolant in the oil definately is not your problem.
OK, trying to write that all out is a bit difficult but hopefully you can get the point I'm trying to make. The point being that from a mechanics point of view, and having heard more 'fish stories' over the years than I care to remember, the guys whole story sounds way too fishy to me to be completely believable.
So, IF you feel you have a moral obligation and choose to help the guy out with the repair, and as John T said your not legally obligated to do so, I'd once again have something else typed up limiting the scope your liability to replacement of the head gasket only. I say this because there is no way you can know what was really done with the tractor, and as a result no way to know what other damage could have been done to the engine by their actions after the gasket blew.
Unfortunately, even with more paperwork, by obligating yourself to the head gasket the case could be made that your still taking responsibility to a problem you specifically released yourself of the liability from when you sold the machine in the first place. As bad as I hate to say it, this is one where I'd be as nice as possible and remind the guy that he tested the tractor, bought it "as-is" and signed a release stating such. So, while you feel bad about the problem he had, when he bought the tractor he bought both the good and the bad, and it's now his problem to fix just as it would have been yours to fix had you not sold it.
This is one thing I caution customers about al lthe time when they are lookint to replace a piece of machinery. They often feel that by buying another used machine that's in 'better shape' than theirs they are getting a deal. What most fail to realize is that regardless of how a machine looks or runs during the time they spend lookint at it prior to buying. Beyond that ANYTHING can go wrong with the 'new' machine just as ANYHTHING can go wrong with the one they already have. In the case of their own machine they know the history and can often predict problems accordingly while with a 'new' machine they know only what they are told and everything else is just guess work.
I guess ultimately it's all a case of you get what you pay for and that's what this guy got, a 47 year old, used tractor with all the associated problems it could possibly have. Problem is this guy sounds like he thinks he also bought the right for the previous owner to make repairs to his 'new' used tractor regardless of the paperwork he signed to the contrary. Beyond that, I wish I could help more, but when it comes down to a someone feeling a moral obligation -vs- an actual legal obligation, the choice as to what you do, and why, is all yours.
