How in the world could this kid's father argue that the school's policy doesn't apply out of class?  Does he honestly think that the school policy against dancing was only valid in the school's classrooms?  If that were the case, there probably wouldn't be a need to sign a contract at the beginning of the year, since the school itself could pretty much ensure that there was no dancing in it's classrooms.

Why did the principal sign the request form?  I find this to be suspect behavior at best.  It smells like buck-passing to me.  He knows the school's policy.  If the school forbids dancing, it ought to be pretty easy to simply deny the request and not sign the form, since the form is requesting permission to go to a dance.  Instead, the principal signs the waiver and then runs to a governing board to let them take action on the situation.  

No, the student *doesn't* deserve to wear the cap and gown.  He deserves to graduate, since that is the result of his academic performance.  But if he's going to choose to flaunt the schools stance on dancing (and I'm guessing he's probably holding his girlfriend's hand from time to time, and maybe even kissing her), he doesn't deserve to be celebrated.  I'm not defending the school's theology or application of theology, but an agreement is an agreement.  He said he would abide by these rules and now he's choosing not to.  Figure out which is more important to you and follow through with that.