First of, you can avoid that battle. Just run around take puppet and run away, give puppet to trainer. No need to defeat dragon.
But as you said this is not problem. You start battle, and it just you lose without actual battle. No units move ?
Never heard of this problem. Do you have some mods in game folder ?
If you have 2 or more mods, it`s possible some of them are making problems among them selves. If this is case, remove all mods , and try game. If it works, place mods 1 by 1 and check game after each.
If you dont have any mods, try patching game with latest version. But there are 2 versions for The Legend , Atari and Nobilis. Give them both try.
Good luck
