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PCActually, the words "it shall be graded in accordance with PSA grading standards and under the procedures of PSA" are straightforward enough ... that card should be submitted to PSA for payment under their guarantee.
First, that card does not meet PSA's stated "grading standards" for a 4. According to PSA: "PSA VG-EX 4 card's corners may be slightly rounded. Surface wear is noticeable but modest. The card may have light scuffing or light scratches. Some original gloss will be retained. Borders may be slightly off-white. A light crease may be visible. Centering must be 85/15 or better on the front and 90/10 or better on the back." Here's the link to PSA's grading standard page: http://www.psacard.com/grading/grading_standards.chtml Does all that paper loss constitute modest surface wear? No way.
Second, it is likely that the card was mislabelled, as opposed to overgraded. You can read PSA's procedures here: http://www.psacard.com/grading/process.chtml Since it is hard to believe that two (and possbly three) graders determined that card was a 4, one can only conclude that the card was improperly labelled, which means it was not properly processed "under the procedures of PSA".
Either way, PSA should honor the guarantee in this case.