If I'm running the Paladin, and this happens, I say, "If you weren't afraid, you wouldn't be negotiating. Since we've already established that you are afraid, all that is left to establish is how afraid you ought to be."
Or/and...
"This is not a puny mortal that stands before you. I'm am a Paladin of the Order of the Ancients, and in this life or the next I will smite you if you come closer, foul beast."
Au contraire! I prefer my meat -- scared. Chomp.
Or/and...
"Hope prevails, or it doesn't. But if it fails, it will not be because I didn't stand in the light."
I mean seriously, it's a Paladin - one liners just roll of the tongue. This guy believes that he's ordained to roll natural 20's in this situation, and that if he dies, maybe it's just to show that he can be raised from the dead.
I'm more tongue-tied verbally than when typing. I'd never come up with stuff like that unless sitting down and thinking about it for minutes which doesn't happen often in the middle of a session.
How could anyone possibly argue that of course he should just run away in this situation and that there is nothing wrong with him doing so?
"You should have fought harder and this wouldn't have happened to you". "You were where? What were you thinking? Of course it's your fault!"
It's actually the DMs fault. The DM set up a situation where the paladin could do the heroic thing and probably die, do the clever thing if the player is fast enough with his mind and tongue... and possibly die anyway, or do the self-survival thing and get blamed for letting himself get into such a situation.
So in almost all the conceivable ways I can see this playing out... it ends with the player picking a new PC that's survivable next time.