It probably comes from watching too much
Law and Order on television, but I'd review the extenuating circumstances before coming to any hoard decision. There are all sorts of questions to be asked, such as:
- How severe of an Assault was perpetrated upon the wife? Was it a severe but non-life-threating attack, or would it be better classified as "Attempted Murder"?
- What was the halfling's exact role in the assault? Did he (or she) participate directly in the attack, or were they only a minor player?
- What's the backdrop of the whole situation -- that is, does this scenario take place in a fairly "civilized" setting such as a large city with a well-developed justice system? Or is the locale more of a backwater, "Wild-West" type of area?
- What are the circumstances of the paladin's act of retribution? Is it an passionate lashing-out at the forces which hurt his loved ones, or is it a cold "You answered all my questions, now you die" method of execution?
- Finally, is this the Paladin's first "transgression" (depending on how the DM interpret's the Paladin's Code)? Or is it merely a continuation of similar offenses in the past?
I'd personally rely on the answers to these questions to guide my decision. If the paladin is acting out of instictual rage at the harming of his loved ones. . .well, that's why the "Temporary Insanity" plea was created.
Ultimately, I probably wouldn't penalize the Paladin in terms of class abilities (unless he was making a hobit of actions such as these), but I wouldn't reward him, either. Although we can sympathize with him for acting the way he did, the fact remains that he may have killed a halfling who (currently) offers no direct threat to him or anyone else.
When all is said and done, I'd probably come up with a set of in-character reprimands for the paladin in question, such as an elder of the faith suspending the character's "Churchly Duties" until the paladin (and the rest of the party) bring to justice the remainder of the group who assaulted the wife. I'd probably also make it a requirement that the remaining criminals be brought in alive.
EDIT:
People really need to get "Lawful = Legal" out of their heads.
Waitaminute; I thought that was
exactly what "Lawful" meant, seeing as
Legal means "of or relating to the Law".
