Dystopianfreak wrote:The hard drive still works, and so data recovery would be easy
You haven't supplied
all of the SMART data, so I cannot confirm or deny your assertion. It is possible that not all sectors are readable, and so not all data could be recovered; or the disk could fail catastrophically in 7minutes from now (or whatever

), which would again not fit with your assertion. etc. etc.
Dystopianfreak wrote:My question is simply how did this happen?
My crystal ball needs cleaning.

Seriously, that's not a simple question. You would need to consider all the history of the drive, to see whether you had done anything mechanical, electrical or chemical to cause premature failure. Or there could have been an underlying microscopic manufacturing defect, or damage caused in transit at any time before you got the disk, or ...
Dystopianfreak wrote:It seems like formatting the disc would skip the bad sectors. Am I wrong in assuming this?
Yes, you're wrong in assuming it's that simple, especially for a disk which is as sick as yours. I don't have time to give a tutorial on disk drive behaviour, internal sector reallocations and the difference between that and what the OS sees when doing a format etc., but the situation is more complex than your question implies. Perhaps another reader can point you to a beginner's guide to disk formatting and sector reallocations.
Dystopianfreak wrote:Any more info on what exactly is wrong with the HDD in question would be appreciated.
That's impossible to diagnose exactly, especially when remote from the disk. If you're really interested, then you can pay a DR company to try to find out - but it's not always possible outside of the manufacturer's FA department, to find out
exactly what is wrong (e.g. DR companies are not usually equipped to remove the encapsulation of ICs, to look for ESD damage). You have to accept (and expect) that a disk can fail at any time, which is why backups are essential.
All I can say from the (limited) info you've given, is that the disk is having problems reading some of the media (these problems might, or might not, be limited to reading from specific head(s)) and as a result it is using its limited number of spare sectors, instead of those hard-to-read areas of the media. The SMART data suggests that the disk
might have used all (or nearly all) of its spare sectors already.