A conference has a number of limited slots for presentations. When your paper is accepted for a conference, someone else's paper got rejected, because it was slightly worse than yours and slots were limited. In this sense, if you are not going to present your accepted paper, this a huge disservice to the conference (and the related community). As I already said in my comment that annoyed you, if everyone did the same thing (did not show up in the conference to present his paper) there would simply be no conference and this will be a huge waste of everyone's time (reviewers, PC comittees etc..). So, the first step is to understand that such a thing would normally never happen.
On the other hand we are still human and life emergencies happen. You may become sick before travelling to a conference and therefore not beeing able to present there. In this case, this is what emails are for. You should have notified the PC chairs that you were not going to make it and ask for leniency. On the other hand, what you describe is even more far-stretched. Your co-author did go to the conference, was probably paid his expenses from his institution and did not bother to show up at the time to present the paper. Imagine the similar example of some PHD student of going to a conference, partying the night before the presentation and not bothering waking up the next time to present. Have you considered the embarassment of the PC member responsible for your session, when they call out your name and noone shows up to present? And nobody even later this day or even two days later, bothers to send an email to apologize for this? Instead you think the conference organizers are in the wrong, because they are actually doing what they told you they would do (contrary to you). Not publish your paper if you do not show up.
A war with them would only hurt you and not them. Apologize sincerely, ask for permission to publish somewhere else and try to be as nice as possible. Do not upload to arxiv before settling things out. And in the next case, understand that in Academia your word is your currency. Make sure you do not break it for whatever reason and if you do (due to some inevitable emergency) make sure you apologize promptly.