I am going by what is in the contract. If I could I would post the contract here and show the exact wording, but there's no means to attach a document. Nothing in the contract states the publisher has the power to release the rights without publication. So if the publisher is releasing me from the contract, there has to be something outside of it granting them the power to do so.
You could quote portions of the contract here: but I'm not sure it would be productive because as the contract wasn't signed by the publisher, it's not legally binding.
My guess--and it is a guess, because I haven't seen the contract--is that there is a clause in the contract which gives the publisher an out somewhere. With a good publisher, there always is.
And they publisher doesn't have to release you from the contract because
they didn't sign the contract. They are not bound by the contract: the contract, legally, doesn't exist.
This is a forum for publishing, so it stands to reason there should be some publishers in here. While they may not be lawyers, publishers are in turn working with contracts
There are publishers here at AW. And editors, and agents, and all sorts of other very experienced publishing professionals. In this very thread you have an acquisitions editor (me!) and a paralegal (I think) who happens to also be a best-selling author, and we're both doing our best to help you.
and I expected someone with experience on the publisher end to be able to answer if a Publisher can refuse to publish something after a contract had been signed when the contract says they will publish it.
I've taken several cracks at this question already but you don't seem to be listening.
The contract WAS NOT SIGNED by the publisher.
The contract, therefore, is not valid.
The publisher is under no obligation to publish your work.
The publisher has told you that it is not going to publish your work.
Take Cathy C's advice if you want: send that email to your editor and hope he or she will consider your future submissions.
If you don't want to do that, that's fine. But recognise, please, that there exists no valid contract between you and this publisher, and this publisher is not obliged to publish your work in this instance.