First, he should have spoken to the larger exhibitor immediately. The exhibitor might have been able to alter the booth construction. Or the show manager could have asked him to mask off the extra height with generic backwall drape. The second mistake was lying about not seeing it during setup. Lying is never a good business decision.
Most shows have height restrictions.
The display house made a mistake by not finding out about the restrictions before building the booth. This needs to be pointed out to the exhibitor. Assuming he's not planning to change the height restrictions, the show manager should call the larger exhibitor immediately after this year's show, explain the height restrictions, follow up with a letter explaining the same and send a copy to the smaller exhibitor. A convention center salesperson was pressed by a show organizer to give her first option on dates only 18 months out. The show organizer was in such a time crunch that the salesperson went in on a Saturday to prepare the contract.