Installing tiles on unlevel floor

Here is my story. A heated tile floor was installed in our kitchen using ditra less than 2 years ago. Within 6 mos. the grout started crumbling/coming out. The contractor came in, said the group was probably mixed wrong, tried to fix it by scraping the grout out and in the process damaged the tile. They offered to re-lay the whole floor. They removed the tile, wires, ditra and undercoat (pretty well down to the subfloor). They then installed new ditra, new heated floor wires, and put a scratch coat over top. The tile guy (not from the contractors crew, but from the tile store) came in today, used his handy dandy laser level, and refused to lay the tile because the floor was unlevel in several places (possibly because part of the room is an addition?). There is a sight line from one end of the room to the other so the tile must be perfectly straight. He said along that line the floor level goes up, down and then up again over the span of 10 feet. He actually tried laying one row of tiles, but only got half way along and would go no further. He didn't want to take responsibility for the job because he knew he couldnt do it right. Said the floor should have been leveled properly in the first place. So he removed the tile he had layed and left. I intend to tell the contractor and the tile store to work it out among themselves, but I worried if it looks bad when it is done I will have no recourse. Its not like I am paying the contractor; the money for this job is coming out of his own pocket, which is probably why he is rushing to get it done. So, my questions are:
1) Should he have re-leveled the floor before installing the ditra?
2) Is there any way, other than tearing it all out again, to resolve this issue? Note: the ditra and heated floor is already down
3) If he gets another tiler to do it and it doesn't look right, should I expect him to fix it again ( I know, seems like a no-brainer, but I will admit I am picky)
3) What is my recourse if he refuses?