Not that I might have a solution to your problem, but just out of an urge to understand the situation better: you didn't mention the Red Prince at all before he became the bad guy. Was he in your party before that point or did you leave him on the top deck or...? (Because I've never kicked party members after Act 1 so I don't even know where they'd go exactly if you do.) Were you there when Tarquin and Gareth started fighting the Red Prince, or did you come back to them already fighting? Were Tarquin and Gareth not hostile to you when this started?
This definitely doesn't make sense from a story point of view, but I wonder if we could at least understand it from a mechanics point of view.
As for killing Tarquin and Gareth, as you must've guessed, they do have a role in the story, and both of them are also merchants. So having to kill them in Act 2 in a first playthrough kinda sucks, yeah.
I don't think using a save backup would defeat the point of Iron Man mode when things go out of control in a bizarre way like this. In this case, Tarquin becoming hostile when seeing an undead companion (if that is really what happened in your case) is arguably an oversight from devs. He is not some random NPC who doesn't know who you are. He is essentially a follower; he just doesn't accompany you in your party. Also as you pointed out, he himself is a necromancer, to boot. It certainly makes sense that he doesn't suffer from the "undead allergy" that NPC's share.
So other than using a save backup, I think the option "leaving them be until Act 2 is completed" might be worth a try. The downside is that, there are a couple things you have to do for the Red Prince's story in Act 2. I don't know what exactly would happen if you finish Act 2 without doing these things, but at the least, some bits and pieces will be missing from his story. Not having access to Tarquin and Gareth's inventories is a bummer, but not a major issue.
Can't you backup your current save first, then revert to your USB backup, so you can revert back to the current save if the other backup doesn't work?
