"Didn't purposely break the contract" And why does it matter? They still broke it, and now they are the most replaceable team in VCT since their contract is invalid. There is no "loophole," they straight up broke contract and riot can relegate them at any time even if they offer a stopgap fix.
No, they were not misled. Riot were willing to overlook them breaching contract temporarily but then the better option of M8 came up. KOI is a low performing team with bad sales and lower views than M8. Riot wants to keep them, and KOI are replaceable. That's all there is to it. "No further warnings" does not mean anything, just that the decision was sudden from Riot and understandably so because M8 just got relegated at the end of the season. Bad circumstances to be in. Not a conspiracy against KOI.