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A native English speaker with a very firm grasp of English grammar has confirmed that the message is grammatically correct. I understand why you might be confused, though. It's trying to succinctly convey a convoluted message. Here is the same message in a less ambiguous form.

If you see this message during either the installation or the update of an Akeeba extension you can safely ignore it. It is not, in fact, a real error. It is a direct consequence of Joomla lacking any sensible form of version management for extensions of the "library" type. We want to prevent accidental downgrades of library packages bundled with our software. Examples of such libraries are FOF and FEF. The only way to implement a safeguard against accidental downgrade is having their pre-installation script check if there is already an installed version. If there is an installed version and it is older than the version included in the package you are trying to install we have to return false from our pre-installation script check method. Joomla sees that and reports "Extension Update: Custom install routine failure." which, while factually correct, is confusing to the end user. Furthermore, this triggers another internal Joomla error reporting that has to do with extensions of the "package" type. A "package" extension is a collection of extensions that Joomla has to install all together. Since one of the included extensions (the "library" type extension) could not be installed Joomla reports “Files Install: Custom install routine failure”. This message will follow the "Extension Update: Custom install routine failure." error message. As explained in this paragraph, both of the error messages described in this paragraph and which should appear on your screen above and below this paragraph should be ignored. None of them signifies an error.

I would argue that this kind of long form error message is something nobody will read. In fact, I won't even argue. I already know because I've been there, done that and had to edit all error messages to 50 words or less. Hence the far more compact, grammatically correct message which explicitly tells you that what you see is not an error, just a stupid thing Joomla does.

Therefore the message you posted is BOTH grammatically correct AND answers your question: the installation did not fail, it succeeded.