This should only happen if the phone has told Asterisk that it understands UPDATE, unless specifically configured to force the use of udpate. Otherwise Asterisk would use INVITE.
Even if it doesn’t understand it, the phone is broken if it doesn’t explicitly reject it. Asterisk is dropping the call because of the lack of response,
You haven’t provided the contents of the UPDATE, but it could be related to session timers, or connected line updates, and you could prevent it by disabling those features, although you will, for example, no longer be told the new destination after a transfer. Also, we’d need to see the contents of the INVITE to see if the phone was claiming to support UPDATE.
I’m assuming FreePBX isn’t forcing update; that would be weird, unless you had explicitly selected the option:
Could it be a router that is trying to be too clever, that doesn’t understand UPDATE?
What is the make and model of the phone. Some soft phones used not to reject re-INVITEs properly.