This is most definately not a 'screw the paladin' situation. And to be clear, I did not write the adventure, I'm only running it (at least this portion).
The text of the adventure actually states (peers around to make sure his players aren't looking) that she will turn on them if freed if she gets half the chance. She has more class levels in barbarian than in cleric, but all that is really just an FYI, as it should not weigh on the paladin's decision in the slightest.
I am firmly NOT in the camp of Paladins should slay all evil regardless of situation. Its total bunk to me. A paladin is a holy warrior, aka the knights of the round table, joan of arc, etc. Their purpose is to right wrongs and protect the innocent and vanquish evil. Paladins of Eilistraee have the additional mandate to try and convert followers of other drow dieties to following Eilistraee.
That does not mean that all drow the party meets the paladin has to parlay with. On the contrary, there have been veritable bloodbaths were the party slaughtered drow coming at them from all angles. But the drow were able bodied, armed, and angry.
This is completely different.
As to what someone said about the paladin making a deal with the archmage and needing to atone... why? If that were the case it was a no win situation. The archmage was invisible, had the drop on the party, and was flying out of reach of many party members. It was parlay or die (when you are 11-12 level and someone introduces themselves as ARCHMAGE Solom... in the FR... you listen).
So anyways. Lively discussion. I love hearing all the opinions on it.