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I saw this bug with my own eyes for the first time. My friend couldn't complete this mission. After he captured the last enemy Castle, the message about the enemy player's progress stopped appearing. Before that, he defeated Nicholas once, and the message appeared as expected, saying that he had been resurrected. My friend never saw Nicholas again. He disappeared as if he had fallen through the earth or drowned in the sea. Even after he explored the entire map, the secondary quest to collect artifacts remained unfulfilled. I was also surprised that his units from Nicholas's territory were going into the Dungeon. No one dared to venture into another player's zone in my game. I defeated Nicholas repeatedly.
Differences between my Walkthrough and my friend's Walkthrough:
1. I completely cleared one zone, then moved on to another - my friend had large unexplored territories not only in the Dungeon but also near the first enemy Castle.
2. I obtained the artifacts and got the Phoenixes before going to Nicholas's zone (I left them in one of the cities) - he didn't do that.
3. I had a Necromancer hero near Faidaen, who was constantly receiving reinforcements from all the Necromancer Castles. My friend had more Emerald Dragons (over 200) than my Necromancer had Necromancer units. There is a clear difference in the time spent playing.
4. I played as a Warrior - my friend played as a Recruit.
I advised him to start the mission from the beginning and do everything as I did. If the bug repeats, increase the difficulty level. Maybe the Recruit is buggy.
Today, I saw a Walkthrough of this mission for version 1.5 on Hugole. It describes this bug. If, like my friend, you defeat Nicholas without having Phoenixes, he may get offended and disappear forever, regardless of the difficulty level. The hero doesn't necessarily need to have them with him. If you want to improve Faidaen, you can keep them in another location.
It seems that someone has the gift of telepathy. I haven't played any mission so similarly to the description in a Walkthrough. I play first, and then I read the Walkthrough. There wasn't a Walkthrough for 1.5 back then.