Fortunately, I used Paypal (backed by a credit card) so if it all goes wrong, I will have no option but to resort to a chargeback on the grounds that I have received NO service at all.
I have also alerted BBB and they are keeping an eye on the situation as well.
Elance has been a bit helpful since then and they are paying $200 on my behalf to Net-Arb for them to resolve the issue. Net-Arb is getting paid $600 to resolve this - they tell me that their arbitration has been upheld by Australian courts which I find unbelievable as I have been following any court cases following internet in Australia (very few of them to begin with) and have not heard of net-Arb.
Net-Arb has been sending a few emails - I find their tone a bit rude and funny as they try to be an internet version of Judge Judy :)
Just imagine you posted a project on Elance and got yourself into this mess! not even worth your time that waste in resolving issues. In our provider had NO intention of delivering the project and they know buyers have to go through a lot before any money can be recovered hence they will try to walk with their money at the first opportunity.
Lets see how this goes in the end - we have lost $1250 and received nothing in return and still continue to waste our time.
I wound how many buyers will return to Elance after this experience.
Will keep you posted on how it goes!