Not A Legal Opinion, But...
It depends upon where you are and what airline. To a substantial degree, airlines CAN modify the National Rules - to a degree. Good Policy? You'll have to make your own choice. In MOST situations, a dysfunctional seat (or seat-back) is considered a seat Out of Service. In some cases A crew member may use the seat, but use by a fare-paid passenger is unthinkable bu an airline that is thinking.
It is always up to the captain, but as you describe it, I doubt the s/he was informed. Please let us know (PM if necessary) in which country this flight began.
By any measure, this is a horrible practice and that INOP seat shoudl have been excluded from service, yes, even if a low priority 'tourist' family of five got bumped. With ONE dead seat, the airline could have found a suitable option, somehow. Here, or via PM, can you share more facts and details? I'd like to inquire a bit more. Thanks.