Yes, a chargeback is probably about the only way he can get his money back. Paypal will always side with the seller with intangible products. Trust me, I've been in that position.
I double checked and its true the money was just on hold but because the claim expired and we didnt come to agreement, the money was refunded to me. the problem with contract is its not very practical for people who just want a site design done quickly as i dont charge a significant amount to get contracts signed. The buyers want some editing done and the psd file as i only sent him jpegs for previews. I am still debating whehter i should announce who he is, let me sleep over it and will say it in the AM
The best method to get yourself protected from this type of issues is ask the buyer to request money or try - free invoice creator to track the delivery. So , you can show to paypal dispute if made.