There would almost certainly be no legal issues with the original developer. The license/franchise belongs to Re-Logic, they simply contracted out work to an external developer while maintaining all rights to the name Terraria and associated products.
For example. Traveler's Tales have been incredibly successful with their Lego games, but the name, the copyright and the License for Lego belongs to the Lego company.
Terraria belongs to Re-Logic, they simply paid someone else to create a Terraria product.
This failed to happen so there will have been a clause in the contract that states that if the product does not meet with approval then all payments will cease and the project will revert to Re-Logic to do with as they wish.
They can look into fixing it, they can hand it to a second external company to complete or if they feel it is beyond redemption, they can cut their losses and cancel it.
As for the amount of progress, that is academic. It is probably more related to the amount of time spent on the project compared to how little progress had been made and how the project failed to meet with Re-Logic's high standards.
When a company has such a strong fan-base on a project that is held in very high regard they do not wish to be associated with something that is below par and that will tarnish their reputation, regardless of the fact that it was someone else who developed it.
The lack of marketing is almost certainly due to the fact that the original developer had so little to show. No real progress, nothing that Re-Logic was proud to allow themselves to be associated with.
If T:OW does finally surface it will probably contain, little if any content from the original team and even if it does, they have been paid for their efforts and Re-Logic will not be obliged to make any further payments. They will have no claim to this title.