FrogReaver
The most respectful and polite poster ever
As best as I can tell it was to give the Paladin a Shining Moment of Awesome where he stares down and intimidates an adult dragon into backing off. Then to his surprise, the Paladin's player, unaware of the 'divine providence' of the 'creator' in this scenario, unabashedly surrendered to save his own life.
And now he's struggling to find a 'Plan B'.
My opinion, you let the guy replace his character mechanically with some other character of the same level based on how the player sees this story playing out. If he wants to play an Oathbreaker paladin, well that's fine. If he wants to convert to a Fighter 6-Warlock 1 and try to atone, that's fine too, albeit I would tell him that the path to Atonement might be very long and difficult. Or if he wants to play as a Paladin 6-Warlock 1 who has lost all of his Paladin class abilities, that would be fine as well (and I would secretly record this as a very positive sign in his road to atonement).
The idea is not to punish the player in the metagame, although in the game the character may be forsaken and have earned the name of 'Oathbreaker' or 'Coward' or whatever, but rather to facilitate further story as the consequence of this choice.
I think for first offense especially one the player actively disagrees with that's too much. I'd go with a dream or vision warning you of potential consequences if you continue to act as you did when you gave the NPC to the dragon.