Yes, you are correct, Oyster PAYG is valid on C2C services between Fenchurch
Street / Liverpool Street via Barking and Upminster - interavability of
fares.

However, if you were using PAYG, you would have to touch out at Upminster to
prevent being charged the maximum fare and causing an incomplete journey,
perhaps this is why they refused to issue you with a ticket? This could have
been explained to you far better though! West Ham is a LU ticket office
which is able to offer a wider-range of NR tickets than most, due to an
agreement with the TOCs. Please bring this to the attention of LU's customer
services department as, from your description of events, there appears to be
several training issues identified.