Oh, huh, didn't realize that could happen. But if the game is asking you to talk to him while also flagging him as dead, that does seem like a bug or oversight. I've only had the PC die in that fight, which was just an automatic game over. So I didn't experience it with anyone else dying.
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It's probably an oversight. I've completed the game twice already and now I'm testing other options and paths. In a new run I left Rylan in prison until after I defeated Arihama. When I released him, he talked as if he participated in the fight. Then when I went to visit his brother with him, it didn't give me the option to go to Riordan's house after leaving.
Now I'm curious to see what happens if other characters die in the Arihama fight, will test that later.
I... don't think there's even supposed to be a way to complete the game yet. If the end is programmed already, it's probably supposed to be inaccessible, but can be found through some bug.
Also, I got the impression you weren't far in at all, since the scenes you're talking about are early game scenes.